How are operating expenses defined in relation to capital expenses?

Operating expenses (OpEx) and capital expenses (CapEx) are crucial concepts in financial management, particularly in understanding how businesses allocate their resources. The correct distinction is that OpEx refers to the costs that a company incurs during its normal operations to run the business on a day-to-day basis. This includes expenses such as salaries, rent, utilities, and many other recurring costs necessary for ongoing business activities.

On the other hand, CapEx refers to the funds used by a company to acquire, upgrade, or maintain physical assets like property, buildings, or equipment. These are often significant outlays that have long-term benefits and are not typically recurring daily expenses.

The distinction is essential for financial reporting and tax purposes, as OpEx can be fully deducted in the year they are incurred, while CapEx generally must be capitalized and depreciated over time. The key takeaway is that OpEx represents the ongoing operational costs that keep the business running, whereas CapEx is associated with long-term investments in assets that will provide value over multiple periods.