Capital & Revenue Expenditure & Receipts

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Cambridge (CIE) IGCSE Your notes

Accounting
Capital & Revenue Expenditure & Receipts
Contents
Capital & Revenue Expenditure
Capital & Revenue Receipts
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Capital & Revenue Expenditure

Your notes
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
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Repairs of non-current assets

Redecoration of existing non-current assets Your notes
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
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What are the effects of treating capital expenditure as

revenue expenditure? Your notes
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
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These will appear on the income

These will not appear as non-current assets on the statement of financial position Your notes
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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Capital & Revenue Receipts

Your notes
Capital Receipts
What are capital receipts?
A capital receipt is money that is received from activity which is not part of a business' day-to-day
trading
These are one-off receipts of money
Capital receipts include:
Capital introduced to the business by the owner(s)
Money received from a loan
The proceeds from the sale of a non-current asset
Capital receipts affect the statement of financial position
They could affect the non-current assets
The sale of a non-current asset reduces the value of these assets
They could affect the current assets
Money in the bank could increase
They could affect the non-current liabilities
Taking out a bank loan increases the amount owed
They could affect the capital
If capital is introduced into the business, the value of capital increases
Capital receipts are not included in the income statement
EXAM TIP
The total proceeds from the sale of a non-current asset do not appear on the income statement.
However, an amount for the profit or loss from the sale does appear on the income statement as an
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income (profit) or an expense (loss). The profit or loss is calculated using the current net book value
of the asset, not the original cost.
Your notes
Revenue Receipts
What are revenue receipts?
A revenue receipt is money that is received from the day-to-day trading of the business
These are regular receipts of money
Revenue receipts include:
The sale of goods
Commission received
Rent received
Interest received
Revenue receipts are included in the income statement
They are not included in the statement of financial position
However, they will contribute to the profit or loss for the year, which is reported in the statement of
financial position
Effects of Incorrect Treatment of Receipts

What are the effects of treating capital receipts as revenue
receipts?
Incorrectly treating capital receipts as revenue receipts will affect the financial statements
Their full value will incorrectly appear as income on the income statement
The income will therefore be overstated
This means the profit for the year will be overstated
What are the effects of treating revenue receipts as capital

receipts?
Incorrectly treating revenue receipts as capital receipts will affect the financial statements
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They will not appear on the income statement

The income will therefore be understated Your notes
This means the profit for the year will be understated
WORKED EXAMPLE
Makkari’s draft income statement for the year ended 29 February 2024 stated a profit of $45 700.
Makkari took out a bank loan for $10 000 on 5 January 2024. However, this was incorrectly treated as
a revenue receipt.
Calculate the correct profit for the year ended 29 February 2024.
Answer
The money received from the bank loan was incorrectly included as an income on the income
statement. This is a capital receipt and therefore it should not appear on the income statement. The
income on the income statement needs to be reduced by $10 000.
The profit for the year ended 29 February 2024 is $35 700.
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Cambridge (CIE) IGCSE Your notes