Lecture 10

Capital & Revenue Expenditure

&
Capital & Revenue Receipts
 You should be able to:
 Distinguish between capital & revenue
expenditure
 Distinguish between capital & revenue receipts

 Explain why some expenditure is part capital

expenditure & part revenue expenditure
 Explain the effect on the financial statements, if
revenue expenditure is wrongly treated as being
capital expenditure, & vice versa
 What is Capital Expenditure ?
 expenditure on acquisition of non-current
assets
 expenditure on an improvement in their
earning capacity
 expenditure that includes costs necessary to
get non-current assets operational
 expenditure that will benefit current & future
period of the business operation
 Capital Expenditure
> is not charged as expense in the Inc/Stmt
> appears as a Non Current Asset in the SOFP
Examples of Capital Expenditure
Examples
 purchase of non-current assets

 extensions made to non-current assets

 other costs to get non-current assets

operational
Cap exp (con’t)

Examples of Other costs to get non-current assets

Operational:
 delivery cost

 installation cost

 inspection & testing Non-Current Assets before use

 legal costs in purchasing property & land

 architect’s fees for building plans & for supervising

construction of buildings
 demolition costs to remove something before new
building can begin
 Revenue Expenditure
Incurred either:
 for the purpose of the trade of the business

i.e. for day to day operation

 to maintain the existing earning capacity of
non-current assets
 lasts less than one year
 Revenue Expenditure
 is charged to the Inc/Stmt
Examples:
 Rent, light & heat, postage, petrol & oil for
motor vehicles, carriage outwards
 Capital OR Revenue exp?
 Purchase of a new factory
 Wages for employees
 Salary of factory manager
 Plant & machinery to equip the factory
 Office equipment
 Purchases of goods
 Petrol costs for van
 Capital OR Revenue exp?
 Putting extra headlights on van
 Spent $1500 on machinery: $1000 was for an
item (improvement) added to the machine; and
$500 was for repairs
 Painting outside of new building
 Repainting outside of building three years later
 Capital Receipts
 Income derived from transactions that are not
the usual activities of the business
 proceeds from the sale of non-current assets
 not included in Inc/Stmt
 only profits ( or losses) from the sale of non
current assets are included in the Inc/Stmt
 Revenue Receipts
 Income derived from the ‘usual’ activities of
the business
 interest & dividends received from
investments held by the business.
 included in Inc/Stmt
 Examples: Sales, Interest received, discount
received
Cap exp? Rev exp? Cap rec? Rev rec?
 Loan of money from the bank
 Sale of break-down truck
 Petrol sales (for a petrol station)
 Assistant’s wages
 Purchase of hydraulic jack
 Carriage paid to bring the new machinery to
the factory
 Complete redecoration of the premises at a
cost of $1500
 Cap exp? Rev exp? Cap rec? Rev rec?
 The purchase of a soft drinks vending machine
for the canteen with a stock of soft drinks
 Wages paid by a building contractor to his
own workmen for the erection of an office in
the builder’s stockyard
 the annual depreciation of leasehold premises
 Cap exp? Rev exp? Cap rec? Rev rec?
 cost of building extension to factory
 purchase of extra filing cabinets for sales
office
 cost of installing engine in delivery van
 Purchase of replacement engine for existing
van
 cost of altering interior of new van to increase
carrying capacity
 Cap exp? Rev exp? Cap rec? Rev rec?

 cost of motor tax for new van

 cost of motor tax for existing van
 cost of painting business’s name on new van
 Incorrect treatment of
expenditure
If one of the following occurs:
 Capital expenditure is incorrectly treated as
revenue expenditure or
 Revenue expenditure is incorrectly treated
as capital expenditure
then both the SOFP and Ins/Stmt figures will
be incorrect.
 THE RULE!
 If expenditure is directly incurred in
bringing a non-current asset into use for the
first time, it is a CAPITAL
EXPENDITURE.
 If expenditure improves a non-current asset
(by making it superior to what it was when
it was first owned by the business, it is
CAPITAL EXPENDITURE
 ALL other expenditures are REVENUE
EXPENDITURE.
 Therefore…
 It is important to classify both expenditure
properly as they will affect both the SOFP
and the Inc/Stmt.
 Revenue expenditure = chargeable as
expense in the Inc Stmt.
 Capital expenditure = increases the value of
non current assets in the SOFP.