Capital Expenses vs Operating Expenses

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• Capital Expenditure (CapEx) The up front spending of money on physical infrastructure, and then deducting that up front expense over time. -- The up front cost from CapEx has a value that reduces over time.

• Operational Expenditure (OpEx) Spending money on services or products now and being billed for them now. You can deduct this expense in the same year you spend it. --There is no up front cost, as you pay for a service or product as you use it.

In other words, when A Corporation owns its infrastructure, it buys equipment that goes onto its balance sheets as assets. Because a capital investment was made, accountants categorize this transaction as a Capital Expense (CapEx). Over time, to account for the assets' limited useful lifespan, assets are depreciated or amortized.

Cloud services, on the other hand, are categorized as an Operating Expense (OpEx), because of their consumption model. Under this scheme, there is no asset for The Corporation to amortize, and its cloud service provider (Azure) manages the costs that are associated with the purchase and lifespan of the physical equipment. As a result, OpEx has a direct impact on net profit, taxable income, and the associated expenses on the balance sheet.

To summarize:

• CapEx requires significant up-front financial costs, as well ongoing maintenance and support expenditures.
• OpEx is a consumption-based model, so The Corporation is only responsible for the cost of the computing resources that it uses.

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