13. Capital and Revenue Expenditure Flashcards
Explain capital expenditure.
An outlay which benefits that business current and future periods. E.g. purchase of non-current asset.
Give two examples of capital expenditure.
Any two
- Purchase of delivery van for business use (or any NCA)
- Installation cost of new machinery
- Extension of premises or major upgrading of NCA
Purchase of office equipment and purchase of van is considered as one example
Explain revenue expenditure.
An outlay which benefits the business one year or less. E.g. payment of operating expenses.
Give two examples of revenue expenditure.
Any two:
- Payment of salaries (or any operating expenses)
- Maintenance of non-current assets
- Immaterial items which may benefit many years e.g. hole puncher
- Purchase of current assets e.g. inventory
State two differences between capital and revenue expenditure
- Capital expenditure benefits more than one year; revenue expenditure benefits one year or less.
- Capital expenditure is recorded as a Non-Current Asset; revenue expenditure is recorded as an expense or current asset
Identify if the following is capital or revenue expenditure and state why.
a) Purchase of new car for business manager.
b) Paid for the certificate of entitlement of the new car.
c) Bought car cushion for the new car.
d) Bought air freshener for the new car.
a) Purchase of new car for business manager.
Capital Exp = car is a NCA which benefits many years.
b) Paid for the certificate of entitlement of the new car
Capital Exp = COE is a nec cost to own the NCA
c) Bought car cushion for the new car.
Revenue Exp = immaterial cost
d) Bought air freshener for the new car.
Revenue Exp = immaterial and last only short term
State if the following is capital or revenue; give reason
Paid for cleaning of new office
Revenue Expenditure
Cleaning benefits only short term
State if the following is capital or revenue; give reason
Paid for goods for resales purposes
Revenue Expenditure
Inventory is current asset benefiting only short term.
State if the following is capital or revenue; give reason
Bought new machinery for production of goods.
Capital Expenditure
Machinery is a NCA benefiting many years.
State if the following is capital or revenue; give reason
Paid for installation of new machinery
Capital Expenditure
Cost necessary to start the use of the NCA.
State if the following is capital or revenue; give reason
Signed maintenance contract on new machinery for a year.
Revenue Expenditure
Maintenance cost is normal operating cost to keep NCA in working condition.
State if the following is capital or revenue; give reason
Paid for new engine in existing machine to increase its production capacity
Capital Expenditure
Upgrading cost that increases NCA capacity, benefiting more than one accounting period.
State if the following is capital or revenue; give reason
Replace existing escalator in mall.
Capital Expenditure
Major overhaul that benefit more than one accounting period.
State if the following is capital or revenue; give reason
Repairs to existing escalator at basement
Revenue Expenditure
Repairs is only for maintenance to bring NCA to its normal working state.
State if the following is capital or revenue; give reason
Paid for delivery of goods to customers
Revenue Expenditure
Normal business operating cost.
Joan paid for the following when she bought her new computer:
a) Cost of computer $2 000
b) Installation of Microsoft office software $200
c) Computer bag $18
d) Various computer accessories $40
How should Joan record these costs
Capital expenditure:
Cost of computer and installation of MS Office software
Revenue expenditure: Computer bag + accessories
Dr Office Equipment $2 200
Dr General expenses $58
Cr Cash at Bank $2 258
Peter bought a machine from Germany and the bill from GG Metal Ware was as follows:
a) Cost of machine $18 000
b) Manpower cost to set up and test run $ 3 000
c) On-Site maintenance (1 year) $ 500
d) Freight and insurance $ 1 200
Give the double entries to record the bill
Capital expenditure:
Cost of machine, set up, freight and insurance
Revenue: on-site maintenance
Dr Machine $22 200
Dr Maintenance of machine $ 500
Cr Other Payable - GG Metal Ware $22 700
State the type of error when business records capital expenditure as a revenue expenditure.
Error of Principle
State how profit and asset will be affected if capital expenditure is wrongly recorded as revenue expenditure
Profit will be understated
Non-current asset will be understated.
State how profit and asset will be affected if revenue expenditure is wrongly recorded as capital expenditure.
Profit will be overstated
Non-current asset will be overstated.
John debited maintenance of his delivery van, $400 to the motor van account. Explain how this error affects the financial statements.
income statement:
Expense will be understated by $400; Profit is overstated by $400
Balance sheet:
Equity (profit) is overstated by $400
Non-current asset (Motor vehicle) is overstated by $400.
Javier paid for a new equipment, $6000. The bookkeeper debited general expense and credited cash at bank. Explain how this error affects the financial statements.
Income statement:
Expense will be overstated by $6 000.
Profit is understated by $6 000.
Balance Sheet:
Equity (profit) is understated by $6 000.
Non-current asset (equipment) is understated by
$6 000.
