MINISTRY OF EDUCATION

EASTER TERM
JANUARY, 2021
GRADE 11
SUBJECT: PRINCIPLES OF ACCOUNTS
WEEK 3 LESSON 2
TOPIC:CAPITAL AND REVENUE EXPENDITURE
CONTENT: TREATMENT OF CAPITAL AND REVENUE EXPENDITURE

Revenue and Capital Expenditure

Capital Expenditure
Capital expenditure is incurred when a business spends money to either: • buy non-current
assets; or add to the value of an existing non-current asset. Included in such amounts should be
the costs of:
1. acquiring non-current assets and
2. bringing them into the business
3. legal costs of buying buildings
4. carriage inwards on machinery bought
5. Any other cost needed to get the non-current asset ready for use.
Revenue Expenditure
Revenue expenditure is expenditure that does not increase the value of non-current assets but is
incurred in the day-to-day running expenses of the business. The difference from capital
expenditure can be seen when considering the cost of running a motor vehicle for a business. The
expenditure incurred in acquiring the motor vehicle is classed as capital expenditure, while the
cost of the petrol used to run the vehicle is revenue expenditure. This is because the revenue
expenditure is used up in a few days and does not add to the value of the non-current asset.

Differences between Capital And Revenue Expenditure

Parameters Capital Expenditure Revenue Expenditure

Capital expenditure is the money spent Revenue expenditure is the money

Definition by a firm to acquire assets or to improve spent by business entities to maintain
the quality of existing ones. their everyday operations.

Time span Capital expenses are incurred for the Revenue expenses are incurred for a
 shorter-duration and are mostly
long-term.
limited to an accounting year.

Such expenses are borne by a company Such expenses are borne by a

Purpose
to boost its earning capacity. company to sustain its profitability.

The yield of these expenses is not The yield of these expenses is mostly
Yield limited to a year and is usually long- limited to the current accounting
term in nature. period.

Occurrence Typically, CAPEX is not quite recurrent. OPEX makes up recurrent expenses.

Capitalisation
Capital expenses are capitalised. Revenue expenses are not capitalised.
of expenses

Treatment of Depreciation of assets is charged on Depreciation of assets is not levied on

depreciation capital expenses. revenue expenditure.

Wages, salary, utility bills printing and

Purchase of Machinery or patent,
stationery, inventory, postage,
Examples copyright, installation of equipment and
insurance, taxes and maintenance cost,
fixture, etc.
among others.

Hence, both capital expenditure and revenue expenditure are vital for the sustainable
profitability of a business venture. Mostly, revenue expenses are a periodic investment which
does not result in immediate or delayed benefit. However, it is used to keep operations
running uninterruptedly.

Alternatively, capital expenditure is considered to be a long-term investment that proves

beneficial for a firm. Business entities must understand that they need to adopt effective

strategies to monitor and regulate these expenses to boost overall profitability significantly.
Joint Expenditure

In certain cases, an item of expenditure will need dividing between capital and revenue

expenditure. Suppose a builder was engaged to build an extension and carry out some repairs

to your premises, the total bill being $500,000. If one-fifth of this was for repair work and

four-fifths the cost of building the extension, then $100,000 should be charged to the profit

and loss account as revenue expenditure, and $400,000 should be identified as capital

expenditure and added to the value of the firm’s premises and shown as such in the statement
of financial position.

Treatment of Loan Interest

If money is borrowed to finance the purchase of a non-current asset, then interest will have to

be paid on the loan. The loan interest, however, is not a cost of acquiring the asset but is

simply a cost of financing its acquisition. This means that loan interest is revenue expenditure

and not capital expenditure, and should be charged to the profit and loss account.

Capital and Revenue Receipts

When an item of capital expenditure is sold, the receipt is called a capital receipt. Suppose a

motor van is bought for $5,000, and sold five years later for $750. The $5,000 was treated as

capital expenditure. The $750 received is treated as a capital receipt. Revenue receipts are

sales and other revenue items, such as rent receivable or commissions receivable.
Self-Check
Read the statements carefully and identify if they are capital or revenue expenditure
1. Annual depreciation of plant and equipment ___________________.
2. Purchase of new production machinery________________________.
3. Cost of equipment repairs __________________________________.
4. Customs duty on the purchase of new equipment ________________.
5. Production wages _________________________________________.
6. Freight costs for the purchase of inventory _____________________.
7. The installation costs of a new factory machine __________________.
8. The costs of repairs to equipment _____________________________
9. Purchase of a new computer _________________________________.
10. Legal fees relating to the purchase of new head office premises for the business __________