CapEx vs OpEx
Each, defined
CapEx
Capital expenditure — Cash spent acquiring or improving long-lived assets in the period — the investing outflow free cash flow subtracts.
OpEx
Expense — Outflows or using up of assets, or incurrences of liabilities, from delivering goods or services — recognized when incurred, not when paid.
Side by side
| CapEx | OpEx | |
|---|---|---|
| Buys | An asset used over years | A cost consumed in the period |
| P&L | Depreciation over its life | In full, immediately |
| Cash flow statement | Investing | Operating |
| Effect on EBITDA | Excluded | Included |
The same purchase, capitalized or expensed
$37,200 of server hardware. Capitalized over three years, year one carries $12,399.96 of depreciation and the balance sheet keeps $24,800.04. Expensed, year one carries all $37,200.
| As CapEx | As OpEx | |
|---|---|---|
| Year-one P&L expense | 12,399.96 | 37,200.00 |
| Asset at year-end | 24,800.04 | 0.00 |
| Cash out in year one | 37,200.00 | 37,200.00 |
| Cash flow statement section | Investing | Operating |
How they relate
The cash is the same either way. What changes is the P&L — capitalizing spreads the cost — and the cash flow statement, where CapEx is an investing outflow and OpEx an operating one.
That is why EBITDA and operating cash flow both look better when a cost is capitalized, and why free cash flow subtracts CapEx back out.
Questions
- How do I decide?
- By policy: a capitalization threshold, often aligned with the $2,500 de minimis safe harbor for tax, and a useful life over one year.
- Can software development be CapEx?
- Yes, under ASC 350-40, for internal-use software in the application development stage.
See it computed
Worked through: the calculators, the journal entries and the tools that use these terms.
- Free cash flow calculatorFree cash flow is a cash and runway metric, calculated as Operating cash flow − Capital expenditures.Calculator
- EBITDA calculatorEBITDA is a profitability metric, calculated as Net income + interest + income taxes + D&A (≈ operating income + D&A with no other non-operating items).Calculator
- Journal entry for an equipment purchaseWhen equipment is bought, debit the fixed asset account for its full cost — price plus delivery and installation — and credit Cash or Accounts payable. Nothing is expensed on the day of purchase; the cost reaches the P&L as depreciation.Entry
- Journal entry for depreciationEach period, debit Depreciation expense and credit Accumulated depreciation for the period's charge. The asset account keeps its original cost; accumulated depreciation, a contra-asset, grows until net book value reaches salvage value.Entry
- Journal entry for capitalized softwareCapitalize qualifying development cost by debiting Capitalized software and crediting the expense it was first booked to (usually wages). Once the software is ready for use, debit Amortization expense and credit Accumulated amortization each month over its useful life.Entry
- Depreciation scheduleStraight-line, declining balance or SYD, with the convention that decides the first period.Tool
Definitions are the glossary’s, generated from the same documents. Figures in the examples are computed by tested functions, not typed. General information for US companies under US GAAP, not accounting or tax advice.