Capital expenditures are the expenses that a company will incur when it increases some values to the existing assets or acquires some new assets that it will use beyond the current accounting (Also see Three Different Types of Accounting) year. As against, operating expenses are the expenses that the company needs to spend to run its daily business operations. Both these expenses will bring different impact to your financial statement; hence, correctly grouping them is crucial. Hopefully, this article will be able to provide you with some insights about capital expenditures and operating expenses. If you need further assistance, please do not hesitate to hire an accounting firm in Johor Bahru.
Business owners need to depreciate or amortise capital expenditures over the years. As an instance, one has bought new equipment or has added some values to one of its existing assets to increase its efficiency or performance. As soon as he starts using the asset, he should depreciate that asset over a certain period to spread the asset’s cost over its useful life. He needs to put a portion of that asset every year within the useful life span.
On the other hand, the costs (Also see Guide to Marginal Cost) that a company has incurred in its normal course of business are the operating expenses. These expenses do not include the cost of goods sold (COGS) that is directly related to the cost incurred for the goods or services provided. Business owners can determine the operating expenses easily from their company’s profit and loss statement. To calculate the net profit that their business has earned, they should subtract the operating expenses as well as other costs from the company’s operating income.
After reading the explanation above, did you realise that capital expenditure (Also see How to Calculate Capital Expenditure?) and operating expenditure are quite different from each other? Capital expenditures are the expenses incurred to upgrade existing assets or buy new assets while operating expenses are the costs the business needs to incur for its daily operations. Companies may require a longer time to earn profits back from the capital expenditures incurred. However, generating profits from the operating expenses incurred will take a shorter period of time.
Some examples of capital expenditures include the purchase of fixed assets or vehicles, adding the values of the assets to upgrade them, as well as expanding the buildings. As against, operating expenses comprise of the wages and salary, costs incurred for advertising, legal fees, insurance fees, costs for the purchase of raw materials and so on.
In a nutshell, capital (Also see Do You Get Confused Between Working Capital and Cash Flow?) expenditures are important purchases that the company will require in the future. These purchases have a useful life that spread beyond the current accounting period that the company has made the purchase. Contrarily, operating expenses refer to the costs the company needs to incur for its daily operation.