Operating expenses are the costs of running the business day to day: rent, wages, utilities, supplies, marketing, insurance, travel, the software subscriptions. They are distinguished from the cost of what the business sells, and from capital expenses, which buy something the business will use for years. The distinction decides how a purchase is recorded and, downstream, how it is treated in the accounts and the return. This page is for the small business owner categorising the month's spending: what an operating expense is, where the capital versus operating line falls on a real purchase, and how to record each so the accountant does not have to redo it. The business expense spreadsheet on this site lays out the operating categories.
The definition
An operating expense is a cost incurred in the ordinary running of the business that is used up within the period: the month's rent, the month's payroll, the electricity, the fuel, the office supplies, the advertising, the travel, the subscriptions. It is recorded in the period it is incurred and it reduces the period's profit. Most of what a small business spends is operating expense.
Capital expense vs operating expense: the test
A capital expense buys an asset the business will use over more than a year: a vehicle, a machine, a computer, a building improvement, sometimes software bought outright. It is recorded as an asset and its cost is spread over its useful life rather than taken in the month it was paid. The test is durability: if the thing will still be in use next year, it is capital; if it will be used up this period, it is operating. Repairs that keep an asset working are operating; improvements that extend its life or capacity are capital.
Why the line matters to the record
A capital purchase recorded as an operating expense makes the month look terrible and the following years look better than they were; the reverse understates costs now. The owner's record should mark capital purchases as such when they happen, with the asset described, so the accountant can treat them correctly. The categories on the business expense spreadsheet here carry an equipment and capital line for that reason.
The grey area, and who decides
Small purchases of durable items, a printer or a chair, are often treated as operating expenses for simplicity under a threshold the accountant sets. Software subscriptions are operating; a perpetual license may be capital. Whether a specific item is deductible in the year or must be capitalised for a specific taxpayer is a tax question the accountant answers; the record's job is to describe the purchase well enough that the question can be answered.
Reimbursed purchases
A team member who buys a durable item on a personal card and claims it back has made a capital purchase for the business; the reimbursement does not change that. Record the claim in the right category with the item described. PerDiemDesk Pro, at $4 per month for the whole team, keeps claims against categories; the free spreadsheet lays out the month.
Questions people ask about operating expenses
Are wages an operating expense?
Yes, the ordinary payroll of running the business is operating expense, recorded in the period paid.
Is a laptop a capital vs operating expense?
Durable and used for years, so capital in principle; many small businesses expense items under a threshold the accountant sets. Describe it on the record and let the accountant apply the threshold.
Is a repair an operating expense?
A repair that keeps an asset working is operating; an improvement that extends its life or capacity is capital.