This week's Wiki-Wednesday topics are CAPEX (or Capital Expenditures) and OPEX (or Operating Expenses). Below are excerpts from both pages, but we've linked back to Wikipedia so you can read both full articles at the source. You can also read more about the savings calculation implications in today's posting on "The Point" Blog.
An operating expense, operating expenditure, operational expense, operational expenditure or OPEX is an ongoing cost for running a product, business, or system . Its counterpart, a capital expenditure (CAPEX), is the cost of developing or providing non-consumable parts for the product or system. For example, the purchase of a photocopier involves CAPEX, and the annual paper, toner, power and maintenance costs represents OPEX. For larger systems like businesses, OPEX may also include the cost of workers and facility expenses such as rent and utilities.
In business, an operating expense is a day-to-day expense such as sales and administration, or research & development, as opposed to production, costs, and pricing. In short, this is the money the business spends in order to turn inventory into throughput. Operating expenses also include depreciation of plants and machinery which are used in the production process.
On an income statement, "operating expenses" is the sum of a business's operating expenses for a period of time, such as a month or year.
In throughput accounting, the cost accounting aspect of the theory of constraints (TOC), operating expense is the money spent turning inventory into throughput. In TOC, operating expense is limited to costs that vary strictly with the quantity produced, like raw materials and purchased components. Everything else is a fixed cost, including labour (unless there is a regular and significant chance that workers will not work a full-time week when they report on its first day).
In a real estate context, operating expenses include costs associated with the operation and maintenance of an income-producing property.
Operating expenses include:
- accounting expenses
- license fees
- maintenance and repairs, such as snow removal, trash removal, janitorial service, pest control, and lawn care
- office expenses
- attorney fees and legal fees
- utilities, such as telephone
- property management, including a resident manager
- property taxes
- travel and vehicle expenses
- Travel expensesare defined as those incurred in the event of travel required for professional purposes.
- For this purpose, “travel” is defined as the simultaneous absence from the residence and from the regular place of employment. It is prompted by professional or company purposes and likely does not concern the traveller’s private life, or concerns it only to a small degree. Travel expenses include travel costs and fares, accommodation expenses, and so-called additional expenses for meals. For the self-employed (contractors and freelancers), the expenses constitute business expenses.
- leasing commissions
- salary and wages
- raw materials
Capital expenditures (CAPEX or capex) are expenditures creating future benefits. A capital expenditure is incurred when a business spends money either to buy fixed assets or to add to the value of an existing fixed asset with a useful life that extends beyond the taxable year. Capex are used by a company to acquire or upgrade physical assets such as equipment, property, or industrial buildings. In accounting, a capital expenditure is added to an asset account ("capitalized"), thus increasing the asset's basis (the cost or value of an asset as adjusted for tax purposes). Capex is commonly found on the cash flow statement as "Investment in Plant Property and Equipment" or something similar in the Investing subsection.
For tax purposes, capital expenditures are costs that cannot be deducted in the year in which they are paid or incurred and must be capitalized. The general rule is that if the property acquired has a useful life longer than the taxable year, the cost must be capitalized. The capital expenditure costs are then amortized or depreciated over the life of the asset in question. As stated above, capital expenditures create or add basis to the asset or property, which once adjusted, will determine tax liability in the event of sale or transfer. In the US, Internal Revenue Code §§263 and 263A deal extensively with capitalization requirements and exceptions.
Included in capital expenditures are amounts spent on:
- acquiring fixed, and in some cases, intangible assets
- fixing problems with an asset that existed prior to acquisition if it results in a superior fixture
- preparing an asset to be used in business
- restoring property or adapting it to a new or different use
- starting or acquiring a new business
An ongoing question of the accounting of any company is whether certain expenses should be capitalized or expensed. Costs that are expensed in a particular month simply appear on the financial statement as a cost that was incurred that month. Costs that are capitalized, however, are amortized over multiple years. Capitalized expenditures show up on the balance sheet. Most ordinary business expenses are clearly either expensable or capitalizable, but some expenses could be treated either way, according to the preference of the company. Capitalized interest if applicable is also spread out over the life of the asset.