Capital and Revenue Expenditure

• In accounting it is paramount to separate between revenue and capital expenditure

• Naturally all business expenditure can be classified as either revenue or capital expenditure
Capital Expenditure
• Capital expenditure is not to be confused with the capital account or capital in general
• Capital expenditure is when a business spends money to either:
✓ Buy a fixed asset or
✓ Add value to an existing fixed asset
• It would thus include the following:
➢ the cost of acquiring fixed assets i.e. the purchase price of the fixed asset itself
➢ the cost of bringing the fixed asset into the business e.g. carriage inwards,
loading and unloading costs, import duty etc
➢ the legal costs of buying buildings
➢ Any other cost incurred to get a fixed asset ready for use for example
installation and tuning costs
• Visit this topic to learn about the accounting treatment of capital expenditure
Revenue expenditure
• Expenditure which is not spent on increasing the value of fixed assets, but on running the
business on a day-to-day basis
• Examples would include:
o Fuel costs
o Repainting a building
o Art restoration
o Purchases
o Rent payments
o Wages and Salaries
o Advertising costs
o Selling and Distribution costs
o Administration costs etc
• Visit this topic to learn more about the accounting treatment of revenue expenditure
Joint expenditure
• It is not at all uncommon for a single sum spend to include both revenue and capital
expenditure
• For example, a business hires a construction company to restore and extend its premises
• In such instances an endeavour must made to separate those costs that can be classified as
revenue expenditure and those to be deemed as capital expenditure
• Once this is done the cost can be treated according to their nature
• Now that we have explained the differences between capital and
revenue expenditure
• It is time to look at how these are recorded in the books
• Obviously the treatment is not the same
Accounting Treatment of Capital Expenditure
• Capital expenditure must be recorded in the General Ledger usually as an non-current asset
• Typical entries are:
I. To record the purchase of an asset:
a. Dr Asset Account with the total amount of the purchase

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 b. Cr Cash/Bank/Creditor's Account
II. To record Additional Expenses:
a. Dr Asset Account
b. Cr Cash/Bank or Creditor's Account
• The balances of capital expenditure account is shown in the Statement of
Financial Position at the end of each period
• Only a portion of this expenditure is transferred to the Income Statement/Profit
and loss account
• This portion usually relates to
depreciation and represents a portion
of the non-current asset that has been
"consumed" or used up in generating
revenue for the current period
Accounting treatment of Revenue Expenditure
• Capital expenditure recorded in the various ledgers depending on their nature
• For example, credit purchases are recorded in the Purchases Ledger
• Rent is recorded in the General Ledger etc
• At the end of each period the total expenses for the period are charged against
revenue for the period in the Profit and Loss Account and appear as expenses in
the Income Statement
• Typical entries are:
I. To record rent paid for the period:
a. Dr Rent Expense Account
b. Cr Cash or Bank
II. At the end of the period transfer the rent amount to the profit and loss account:
a. Dr Profit and Loss Account
b. Cr Rent Expense Account
Effects of incorrect classification and treatment
• Since their accounting treatment is different failure to properly classify and
record profit has an effect on profit
• Treating capital expenditure as revenue expenditure will:
o Result in the understatement of non-current assets and
o Reduce the profit figure resulting in it being understated
• Treating revenue expenditure as capital expenditure will:
o Result in non-current assets being overstated
o Profit for the period being overstated

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