The Complete Guide to Prepayment Amortization for Finance Teams
Learn how to correctly record, track, and amortize prepaid expenses so your balance sheet is always accurate — without Excel.
Read
Accounting Fundamentals5 min read27 March 2026
CapEx vs OpEx: How to Decide Which Category a Cost Belongs In
Misclassifying capital expenditure as operating expense (or vice versa) distorts both your P&L and your balance sheet. Here is how to make the call correctly.
The distinction between capital expenditure (CapEx) and operating expenditure (OpEx) is one of the most consequential classifications in accounting. CapEx is capitalised on the balance sheet and depreciated over time. OpEx is expensed immediately in the period it is incurred. Getting the classification wrong distorts both the P&L and the balance sheet.
The Core Distinction
CapEx creates an asset that provides economic benefit over more than one accounting period. OpEx is consumed within the current period. A new piece of equipment used for five years is CapEx. The electricity to run it each month is OpEx.
Common Examples
- CapEx: computer hardware, machinery, leasehold improvements, vehicles, intangible assets
- OpEx: salaries, rent, utilities, software subscriptions, office supplies, repairs and maintenance
- Grey area: software development costs (may be CapEx under certain criteria), website builds, major refurbishments
The distinction matters for tax too. OpEx is generally fully deductible in the period incurred. CapEx is deducted over the useful life of the asset through depreciation — though capital allowances rules vary by jurisdiction.
The Capitalisation Threshold
Most companies apply a minimum threshold below which costs are expensed regardless of their nature. A £100 stapler is not capitalised even though it will last several years. The threshold is set at a level where the accounting effort is proportionate to the materiality of the item — typically between £500 and £5,000 depending on the size of the business.
How Prepayments Fit In
Prepayments are related but distinct. A prepayment is an operating cost paid in advance — it will be expensed in full over the coverage period. CapEx is a cost that creates a long-term asset that is depreciated, not amortized as an expense. Annual software licences are typically OpEx prepayments; a perpetual software licence might be CapEx. The classification should follow your accounting policy and be applied consistently.
Further Reading
Ready to automate your prepayment and accrual tracking?
CloseKit replaces your spreadsheets with instant balance sheet reconciliations. Start a free trial — no credit card required.
More articles
Accrued Expenses vs Prepaid Expenses: Key Differences Explained
Confused about when to accrue a cost vs when to prepay it? This guide explains the difference with clear examples and accounting treatment for each.
Read
How to Track Accrued Liabilities Without a Spreadsheet
Accrued liabilities are easy to forget and hard to reconcile in Excel. Here is a better way to record, track, and reverse them every month.
Read
Journal Entries for Prepayments and Accruals: Worked Examples
Step-by-step debit and credit examples for the most common prepayment and accrual scenarios finance teams encounter every month.
Read