Capital & Revenue Expenditure (Cambridge (CIE) O Level Accounting)
Revision Note
Written by: Dan Finlay
Reviewed by: Lucy Kirkham
Capital Expenditure
What is capital expenditure?
Capital expenditure is money that is spent on non-current assets for the long-term benefit of the business
Capital expenditure includes:
The purchase of non-current assets
The delivery of non-current assets
The installation of non-current assets
The legal costs incurred with the non-current asset purchases
The decoration of new non-current assets
The extension of non-current assets
e.g. increasing the size of a storage warehouse
Capital expenditure is included in the statement of financial position under the non-current assets section
It is not included in the income statement
Revenue Expenditure
What is revenue expenditure?
Revenue expenditure is money that is spent on the day-to-day running costs of the business
Revenue expenditure includes:
The purchase of goods for resale
General expenses
Insurance
Training costs
Repairs of non-current assets
Redecoration of existing non-current assets
Revenue expenditure is included in the income statement
It is not included in the statement of financial position
However, it will contribute to the profit or loss for the year, which is recorded in the statement of financial position
Worked Example
Ajax buys a new vehicle. The following table shows the payments Ajax has made.
$ | |
Cost of the vehicle | 27 500 |
Delivery cost of the vehicle | 300 |
Insurance | 800 |
Fuel costs | 400 |
How much is the capital expenditure?
Answer
Identify whether each cost contributes to revenue expenditure or capital expenditure.
Type of expenditure | |
Cost of the vehicle | Capital |
Delivery cost of the vehicle | Capital |
Insurance | Revenue |
Fuel costs | Revenue |
Add together the costs that contribute to capital expenditure.
$27 500 + $300 = $27 800
Effects of Incorrect Treatment of Expenditure
What are the effects of treating capital expenditure as revenue expenditure?
Incorrectly treating capital expenditure as revenue expenditure will affect the financial statements
It will incorrectly appear as an expense on the income statement
The expenses will therefore be overstated
This means the profit for the year will be understated
It will not appear as a non-current asset on the statement of financial position
The non-current assets will therefore be understated
The capital will be understated because of the understated profit
What are the effects of treating revenue expenditure as capital expenditure?
Incorrectly treating revenue expenditure as capital expenditure will affect the financial statements
It will not appear on the income statement
The expenses will therefore be understated
This means the profit for the year will be overstated
It will incorrectly appear on the statement of financial position
The non-current assets will therefore be overstated
The capital will be overstated because of the overstated profit
How do I treat low-valued non-current assets?
Some non-current assets have a small cost to the business
Calculators
Staplers
Waste bins
The accounting principle of materiality means that a business should treat these items as expenses rather than non-current assets
These will appear on the income
These will not appear as non-current assets on the statement of financial position
Worked Example
Ajax paid $2 000 for installation costs of new equipment. He treated this as revenue expenditure.
Describe what effects this will have on the financial statements. Ignore any depreciation costs.
Answer
The $2 000 has been incorrectly posted to the income statement as an expense. Therefore the expenses are overstated by $2 000 which means the profit is understated by $2 000.
The $2 000 has been omitted from the statement of financial position. Therefore the non-current assets are understated by $2 000. The capital is also understated by $2 000 because the profit has been understated.
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