Updated last 26.03.2021

Which are the main types of expenses?

Generally, from accounting point of view expenses may be classified into three major groups:

• Operating expenses: OPEX are short-term in their nature and they are required to provide for the daily main business transactions. The examples of operating expenses include:

- Rents;

- Personnel salaries;

- Utilities (water, electricity, gas);

- Advertising

- Business trips, etc.

• Capital expenses: CAPEX are of long-term nature and they are related to the investments aimed at generating future benefits (exceeding one year). Capital expenses include the purchase (and in certain cases the modernisation) of non-current assets such as:

- Acquisition of land and buildings;

- Acquisition of plant and equipment (machines, motor vehicles, computers);

- Enhancements and modernisation of existing non-current assets;

- Acquisition of non-current intangible assets such as software licenses, etc.

• Accounting depreciation and amortisation: non-monetary expense which reflects the wear and tear of a given non-current asset over time thus reducing its accounting value (which leads to decrease in the accounting profit, respectively the corporate tax due). Depreciable assets include:

- Non-current tangible assets (NCTA): such as buildings, machinery, equipment;

- Non-current intangible assets (NCIA): such as trademarks, copyrights;

- Investment properties (except land and those which are reported at fair value);

- biological assets such as flocks of sheep, herds of cows, or vineyards (except those which are reported at fair value).

What are some of the main specific features in the accounting of operating expenses?

Operating expenses are deducted (are recognised fully in the calculation of the financial result) during the accounting period in which they are incurred. Thus operating expenses are directly linked the accounting profit and respectively to the corporate income tax  that the company owes at the end of the accounting period.

What are some of the main specific features in the accounting of capital expenses?

Capital expenses made are reported as an increase in the non-current (tangible or intangible) assets in the balance sheet. At the same time the cash flows associated with capital expenses are reported in the cash flow statement in the section “investment activities”, since these are expenses incurred in the specific accounting period.

Unlike operating expenses capital expenses are not recognised all at once in a specific accounting period. Once the capital expense is recorded in the balance sheet (as a new asset or an improvement of an existing asset), it is amortised over time so as to allocate the asset’s value over its useful life. In other words every year a portion of the non—current asset is expensed. Such “expensing“ is reported by means of the accounting depreciation / amortisation expense, which is determined based on the depreciation / amortisation rate chosen by the company.

 

What are some of the main specific features in the accounting of the depreciation / amortisation?

The percentage (or rate) by which the various types of the non-current tangible and intangible assets of the company are depreciated every month depending on the depreciation / amortisation rates underlying the accounting policy of the company.

This “depreciation” is practically allocation of the value of the asset over its useful life, less the asset’s residual value (i.e. the value of the asset at the end of its useful life if the value is significant). The asset’s depreciation / amortisation starts as of the beginning of the month of its acquisition or entering into exploitation (or the beginning of the following month) and continues until its actual and accounting depreciation.

Important to know

The depreciation / amortisation is related to the corporate income tax, and the depreciation / amortisation expense, which can be used to reduce the tax due is referred to as annual depreciation for tax purposes. It may differ in terms of the amount from the depreciation for accounting purposes and is calculated using a formula set out in Art. 58, para 3 of the Corporate Income Tax Act (CITA), according to the defined tax amortization norms in Art. 55, para 2 CITA.

 

For more information

Additional information regarding the accounting treatment of the acquired (through capital expenses) non-current assets is available in International Accounting Standard 16 (Property, Plant and Equipment), as well as in Accounting Standard 16 (Non-current Tangible Assets) of the National Accounting Standards: IAS 16; NAS 16. Additional information regarding the accounting treatment of depreciation / amortisation expenses is available in Accounting Standard 4 (Depreciation) of the National Accounting Standards.

The choice of the above-mentioned standards (IAS or NAS) depends on the basis of accounting adopted by your business for the preparation of the annual financial statements.