Differences between Capital Expenditure (CapEx) and Operational Expenditure (OpEx)

by KAUSTUBH SHARMA on April 3, 2022, 6:31 a.m. with 891 views

When you are dealing with IT Infrastructure, you should consider two different types of expenses:

• Capital Expenditure (CapEx) 
• Operational Expenditure (OpEx)

 

 

 

CAPITAL EXPENDITURE (CapEx):

• Up-front (Advance) expenses on physical infrastructure and then deducting that up-front expense over time. 
• Its value reduces over time.

 

Example of Capital Expenditure(CapEx):

• Suppose your organization wants to set up a data center on-premise.
• For that, your organization has to buy equipment like servers, network cables, routers,  air conditioners, etc. that go onto its balance sheets as assets.
• Because a capital investment was made or you have to pay up-front (advance) money or all these assets, accountants categorize this transaction as a CapEx.
• Over time, after their useful lifespan, assets are depreciated or amortized.

 

 

OPERATIONAL EXPENDITURE (OpEx):

• Billed for services or products now.
• Deducting this expense in the same time period you spend it, but no up-front cost, as you pay for a service or product as you use it.

 

Example of Operational Expenditure(OpEx):

• On the other hand, If your organization opted for Cloud services.
• There will be no asset for your organization to amortize, as their chosen cloud service provider (like Azure, AWS, Google Cloud, etc.) manages the costs that are associated with the purchase and lifespan of the physical equipment. 
• That's why Cloud services are categorized as an OpEx, because of their consumption model. 
• As a result, OpEx has a direct impact on net profit, taxable income, and the associated expenses on the balance sheet of your organization.

 

 

CONCLUSION/ SUMMARY OF CAPITAL EXPENDITURE (CapEx) vs OPERATIONAL EXPENDITURE (OpEx)

• CapEx
  • Significant up-front financial costs.
  • Ongoing maintenance expenditures.
  • and support expenditures.
• OpEx
  • Consumption-based model.
  • You are only responsible for the cost of resources you are using.

 

 

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