Difference between CAPEX and OPEX

Capital expenditure (CAPEX) is cost incurred or paid to acquire capital goods. That is goods/properties not for re-sale purpose.

Whereas, Operating expense (OPEX) is also referred to as operating expense or revenue expenditure and it entails cost paid or incurred for the purpose of purchasing goods for re-selling purposes.

OPEX works as revenue expenditure and the assets acquired are subjected to depreciation. The initial cost incurred to acquire these type of assets is an investment in inventory for the organization has an intention of re-selling to make some profits.

Illustration of OPEX

Scenario two: If the business purchases office equipment, a purchases account will be opened and NOT office equipment account for this is a case of operational expenditure.

Example

Let us consider the example we used in the case of capital expenditure Power House co ltd

Assume that Power House co ltd buys and sells kitchen utensil manufacturing machines. On 1st/01/2019, the organization bought 10 spoon-manufacturing machine of $100,000 by check. On 30th/04/2019, the organization had sold seven (7) machines at a selling price of $15,000 each by cash

Required

i). Show the journal and ledger account entries at the time of purchase and when the sales were made

ii). Determine the value of the closing inventory as on 30th/04/2019

Solution

On purchasing of the spoon manufacturing machine on 1st/01/2019

NB1: That these 10 machines bought will not be subjected to depreciation at the end of the financial period for the intention of their acquisition was not for furthering business operations but was meant for re-selling

NB2: That, the fact that the asset purchased may be big in size does not qualify it to be a fixed asset (ie non-current asset). Rather, it depends on the intention behind the purchase.

On sale of the 7-spoon manufacturing machine on 30th/04/2019

NB3: Now that there was purchase and sale of spoon-manufacturing machines, we need to determine the net profit or net loss made as at 30th/04/2019 as per (i) requirement

NB4: The gross profit gotten is also the net profit for there was no operating expenses so far.

   ii) Inventory valuation

The International Accounting Standards (IAS-NO 2) requires that inventory be valued at;

1. Cost or
2. Net realizable market price

Whichever is lower

As at 30th/04/2019, the market value of a spoon-manufacturing machine was $15,000 whereas the cost value was $10,000. Therefore, the value of the unsold units of purchases (closing inventory) will be pegged on $10,000 for it is lower compared to the market price of $15,000

Closing inventory value=3*10,000=$30,000