Differences between CAPEX and OPEX

Expenses are categorized to prepare financial statements, with CAPEX and OPEX. OPEX represents operating expenses, and CAPEX represents capital expenditures. OPEX covers day-to-day operations, while CAPEX involves acquiring assets for long-term use. In this blog post, we will show you how to keep control of this information in Jira in a very simple way.

As it's known, the categorization of expenses is necessary to prepare a company's financial statements. Financial statements must present expenses clearly and concisely for everyone on the team or company to understand them.

In this context, OPEX and CAPEX are two accounting terms used to categorize a company's expenses. OPEX, which stands for "operating expenses," refers to expenses incurred to maintain the day-to-day operations of a company. CAPEX, which stands for "capital expenditures," refers to expenses incurred to acquire tangible assets that will be used over an extended period.

Differences between OPEX and CAPEX

The main difference between OPEX and CAPEX is the duration of the benefits they generate. Operating expenses provide short-term benefits, whereas capital expenditures provide long-term benefits.

Another significant difference is how expenses are recorded in financial statements. Operating expenses are recorded as expenses in the period they are incurred. Capital expenditures are recorded as assets on the balance sheet and are depreciated over their useful life.

When to classify an expense as CAPEX

An item of expenditure should be classified as CAPEX when it meets these three points:

1. It's an asset expected to be used for more than one year.
2. It will generate economic benefits for the company during its useful life.
3. It has a significant cost.

Some examples of expenses that can be classified as CAPEX include:

•    Land purchase.
•    Buildings.
•    Equipment acquisition.
•    Software acquisition.
•    Research and development.

In some cases, classifying an expense as CAPEX can be subjective. In these cases, we strongly suggest to consult with an accounting or financial professional for guidance.

Here are some specific examples of when to classify an expense as CAPEX:

•    A company that purchases an office building to use as its headquarters should classify the expense as CAPEX. The building is an asset expected to be used for more than one year and will generate economic benefits for the company during its useful life.
  
  
•    A company that purchases new production equipment to manufacture its products should classify the expense as CAPEX. The equipment is an asset expected to be used for more than one year and will generate economic benefits for the company during its useful life.
  
  
• A company that spends money on research and development to develop a new product should classify the expense as CAPEX. Research and development are investments expected to generate economic benefits for the company in the future.

When to classify an expense as OPEX

An expense should be classified as OPEX when it meets the following criteria:

1. It is not an asset expected to be used for more than one year.
2. It will not generate economic benefits for the company during its useful life.
3. It does not have a significant cost.

Some examples of expenses that can be classified as OPEX include:

•    Salaries and benefits
•    Rent
•    Utilities
•    Supplies
•    Maintenance
•    Advertising
•    Marketing

Just like with CAPEX, in some cases, classifying an expense as OPEX can be subjective. In these cases, we also strongly suggest to consult with an accounting or financial professional for guidance.

Here are some specific examples of when to classify an expense as OPEX:

•    An employee's salary is considered an operating expense. Salary is an expense necessary to maintain the company's operations but does not generate long-term economic benefits.
  
  
•    The rent for an office building is considered an operating expense. Rent is an expense necessary to maintain the company's operations but does not generate long-term economic benefits.
  
  
•    Utilities such as electricity and water are considered operating expenses. These services are necessary to maintain the company's operations but do not generate long-term economic benefits.
  
  
•    Supplies such as paper and pens are considered operating expenses. These supplies are necessary to maintain the company's operations but do not generate long-term economic benefits.
  
  
•    Equipment maintenance is considered an operating expense. Maintenance is necessary to keep the equipment running but does not generate long-term economic benefits.
  
  
•    Advertising and marketing are considered operating expenses. These expenses are necessary to promote the company's products or services but do not generate long-term economic benefits.

How to keep track of project expenditures?

A good practice for project managers, managers, etc., is to track the expenses of their projects and categorize them as CAPEX or OPEX to simplify the work of the financial team. One easy way to do this is by using an app like Budgety, which allows you to track your project's budget and expenses directly in Jira.

In general, capital expenditures are suitable for investments that will yield long-term benefits, while operating expenses are suitable for regular expenses that will not generate long-term benefits.

In conclusion, categorizing expenses as CAPEX and OPEX is an important practice that can help companies improve their efficiency, profitability, and decision-making."