Operating Expense VS Capital Expense: What’s the Difference?Download Now: FREE GST 2023 GuidebookDownload Now: FREE Employment Pass ChecklistDownload Now: Free Incorporation Checklist
There are a variety of expenses that come with owning and operating a business. These expenses can be separated into different categories. Two of the most common types of expenses are operating expenses and capital expenses. In this article, we’ll discuss what they are, the importance of them and how to calculate them.
What Are Operating Expenses?
An operating expense is an expense required for the day-to-day functioning of a business, meaning that a business incurs operating expenses on a recurring basis. Operating expenses include things like insurance, payroll, and marketing.
If equipment is leased instead of purchased, it is commonly considered an operating expense. General repairs and maintenance of existing fixed assets such as buildings and equipment are also considered operating expenses unless the improvements increase the lifespan of the asset.
What Are Capital Expenses?
On the other hand, capital expenses are incurred to create a benefit in the future. They are long-term in nature and are generally used to acquire things like property, equipment, and technology.
A capital expenditure is incurred when a business spends money, uses collateral, or takes on debt to buy a new asset or to add value to an existing asset with the expectation of receiving benefits for longer than a single tax year. Simply put, it represents an investment into the business.
The Importance of Operating Expenses & Capital Expenses
Capital expenses allow companies to help maintain their property and/or equipment and find ways to improve these assets, whether that's through repairing them regularly or by purchasing new ones.
On the other hand, when business owners are able to understand operational expenditures, they can often find cost-efficient measures and identify opportunities for increased efficiency.
How to Calculate Operating Expenses & Capital Expenses
Capital expenses can be calculated by using the information found on a company's financial statements, specifically its balance sheet. To calculate this figure, use the following formula:
Capital expenses = PP&E (current period) - PP&E (prior period) + depreciation (current period)
Whereas to calculate a company's operating expenses, simply follow this formula by adding all your day-to-day expenses together:
Operating expenses = accounting supplies + expenses on office supplies + insurance + licensing fees + legal fees + marketing and advertising + payroll and wages + repairs and equipment maintenance + taxes + travel + utilities + vehicle expenses
When in Doubt, Reach Out!
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