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What is Capital Expenditure (CapEx) & Operational Expenditure (OpEx)?

These terms are largely used in the accounting field and are used to differentiate the expenses in a broad way.

Capital Expenditure or CapEx

The expenses are done on plant and equipment or anything which will be an asset for the company and going to be used for more than one year is considered in capital expenditure.

Simply stating capital expenditure is money spent on buying fixed assets that will be with the company for more than one tax year.

Following expenses are considered in capital expenditures;

1. Machinery

2. New plant/ an expansion/ new office

3. Vehicles/ transport

4. New software

5. Computers

At end of each year, some expenses are subtracted from profit to get the final value to be taxed. Capital expenditures are not fully subtracted from profit (meaning they’re fully taxed). But their depreciation is considered each year (tangible assets like plant & equipment are depreciated and intangible assets like patents/ licenses are amortized over time).

Operational Expenditure or OpEx

The expenses done on regular operations like maintenance, salary of employees, antivirus for computer, etc. are considered in operational expenditure. These are not one time expenses like capital expenditure but are regularly need to be done to continue operations. This is also called revenue expenditure.

Following expenses are considered in operational expenditures;

1. Wages

2. Rent & utility

3. Travelling

4. Interest on debts

5. Taxes on property

In simple terms, when you buy a machine it is considered in capital expenditure and its maintenance is considered in operational expenditures. Buying a vehicle is considered in capital expenditure and its fuel & maintenance is considered in operational expenditure. But if you get a machine/ vehicle on lease its rent and maintenance both considered in operational expenditure.

Operational expenditures are incurred each tax year and are fully subtracted from profit (meaning not taxed). Because of this, companies prefer leasing computers/ property instead of buying it, gives them benefits in tax.

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