5/18/2020 Capital Expenditures vs. Operating Expenditures: What's the Difference?

CORPORATE FINANCE & ACCOUNTING ACCOUNTING

Capital Expenditures vs. Operating Expenses:

What's the Difference?
By J.B. MAVERICK | Updated Mar 17, 2020

Capital Expenditures vs. Operating Expenditures (Expenses): An

Overview
In financial accounting capital expenditures (CapEx) and operating expenditures (expenses)
(OPEX) are two categories of business expenses. However, there are distinct differences
between the two, including their respective tax treatments.

KEY TAKEAWAYS
Capital expenditures comprise major purchases that will be used in the future. 
Operating expenditures (expenses) represent day-to-day costs that are necessary to
keep a business running.

Capital Expenditures
Capital expenditures consist of the funds that companies use to purchase major physical
goods or services that the company will use for more than one year. A company might incur
CapEx to increase or improve its fixed assets, for example.

Important: Fixed assets are treated as noncurrent assets from an accounting

standpoint, which means that they will not be consumed in the first year.

Capital expenditures can include:
Plant and equipment purchases
Building expansion and improvements
Hardware purchases, such as computers
Vehicles to transport goods

The type of industry in which a company operates largely determines the nature of its capital
expenditures. The asset purchased can be a new item or something that improves the
https://www.investopedia.com/ask/answers/020915/what-difference-between-capex-and-opex.asp 1/4
5/18/2020 Capital Expenditures vs. Operating Expenditures: What's the Difference?

productive life of a previously purchased asset.

The capital expenditure is recorded as an asset on the balance sheet under the property,
plant, and equipment (PP&E) section. However, it's also recorded on the cash flow
statement under investing activities because it's a cash outlay for that accounting period.

Once the asset is being used, it is depreciated over time to spread the cost of the asset over
its useful life. In other words, each year, a portion of the fixed asset is being used up.
Depreciation represents the degree of wear and tear on a fixed asset; companies may deduct
the amount of depreciation on their annual tax return. Capital expenditures are often
depreciated over 5 to 10 years, but in the case of real estate, they may be depreciated over
more than two decades.

Operating Expenses
Operating expenditures are the ordinary and necessary expenses (O&NE) that a company
spends to operate its business each day.

Operating expenditures can include:

Rent
Utilities
Salaries and pension plan contributions
Any expense that falls under selling, general, and administrative expense (SG&A) on the
income statement
Research and development (R&D)
Property taxes
Business travel

Because operating expenses make up the bulk of a company's ongoing costs, management
typically looks for ways to reduce its OPEX without causing a critical drop in quality or
production output. In contrast to CapEx, operating expenses are fully tax-deductible in the
year they are made.

An item that normally would classify as a capital expenditure may be

considered an operating expense if the company chooses to lease it instead of
buying it.
This can be an attractive accounting option if the company has limited cash
flow and wants to be able to deduct the total cost of an item in a tax year.

https://www.investopedia.com/ask/answers/020915/what-difference-between-capex-and-opex.asp 2/4
5/18/2020 Capital Expenditures vs. Operating Expenditures: What's the Difference?

Key Differences vs. CapEx and OPEX

Funds that fall under capital expenditures are for major purchases that will be used in the
future. The life of these purchases extends beyond the current accounting period in which
they were purchased. Because these costs can be recovered only over time through
depreciation, companies usually prepare a capital expense budget apart from OPEX.

Operating expenses represent the day-to-day expenses necessary to run a business. Because
these are short-term costs that are used up in the same accounting period in which they
were purchased, it makes sense for them to have a separate budget.

Related Terms
Capital Expenditures: What You Need to Know
Capital expenditures, or CapEx, are funds used by a company to acquire or upgrade physical assets
such as property, buildings, an industrial plant, or equipment. more

Capitalized Cost Definition

A capitalized cost is an expense that is added to the cost basis of a fixed asset on a company's balance
sheet. more

Noncurrent Assets Definition

Noncurrent assets are a company's long-term investments, which are not easily converted to cash or
are not expected to become cash within a year. more

Earnings Before Interest and Taxes – EBIT Definition

Earnings before interest and taxes is an indicator of a company's profitability and is calculated as
revenue minus expenses, excluding taxes and interest. more

Fixed Capital
Fixed capital includes the assets, such as property, plant, and equipment, that are needed to start up
and conduct business, even at a minimal stage. more

Understanding Cost of Goods Sold – COGS

Cost of goods sold (COGS) is defined as the direct costs attributable to the production of the goods
sold in a company. more

TRUSTe
https://www.investopedia.com/ask/answers/020915/what-difference-between-capex-and-opex.asp 3/4