Capitalized vs expensed costs (capex vs opex)

An expensed cost is recorded on the income statement in the period it is incurred and reduces profit immediately. A capitalized cost is recorded as an asset on the balance sheet and then charged to the income statement gradually, through depreciation (for physical assets) or amortization (for intangible assets), over the periods it is expected to benefit.

Capital expenditure, or capex, usually refers to cash spent on long-lived assets such as buildings, equipment and data centres. Operating expenditure, or opex, is spending that is expensed as it occurs — salaries, rent, marketing, most repairs.

Property, plant and equipment is recorded at cost and depreciated over its useful life under ASC 360. Interest incurred while certain assets are being built is capitalized into their cost under ASC 835-20.

Research and development is the main exception people expect to be capitalized but is not: under ASC 730-10-25-1, R&D costs are expensed as incurred. That is why a research-heavy company can report low profits while building something valuable.

Software is split. Costs of internal-use software can be capitalized once the criteria in ASC 350-40 are met (FASB amended those criteria in 2025 with a later effective date), while costs of software to be sold are capitalized only after technological feasibility under ASC 985-20. In both cases a company's policy note explains what it capitalizes.

Capitalizing a cost raises current operating income compared with expensing it, and lowers operating income in later periods as depreciation or amortization is charged. Over the asset's whole life the total charge is the same; only the timing differs.

On the cash flow statement, cash spent on capitalized assets is generally an investing outflow, while expensed costs reduce operating cash flow. So capitalizing more makes operating cash flow look higher. Free cash flow, which subtracts capex from operating cash flow, is designed to undo that — but only for the investing lines a given definition subtracts.

Aerarium computes free cash flow as operating cash flow minus capex, with capex taken from the purchases of property, plant and equipment the company tags in its cash flow statement. Spending a company reports on a separate investing line — capitalized software development, for example — is not part of that capex figure.

When comparing companies, check the investing section of the cash flow statement for such lines, and read depreciation and amortization alongside capex: capex persistently above depreciation usually means the asset base is growing, while the reverse can mean it is being run down.