In business as well as in your own personal finances, it is important to have an understanding of the difference between ‘Capital Expenses’ and ‘Operating Expenses’.

Capital Expenses are typically once off investments or once off purchases of assets.  So an example of a capital expense for a typical person might be purchase of a house or a car.

For businesses, Capital Expenses might include purchases of machinery used to make things, or even purchase of a website.

Operating Expenses are generally costs that occur frequently during the day to day operations of a persons life, or a business.  For a person, an operating expense might be rent, or food costs, whereas for a business an operating expense might be employee salary costs or marketing costs.

In financial accounting, Capital Costs are treated differently to Operating Expenses.  In the Profit and Loss Statement, rather than include the full capital cost as one of the ‘expenses’, a portion of the capital cost is allocated as a ‘non-cash cost’ and is called ‘depreciation‘ or ‘amortisation’.