13.2 What is the difference between capital and revenue expenditures? Flashcards
What are the two types of expenditures related to non-current assets?
- Capital expenditure
2. Revenue expenditure
What do capital expenditures consist of?
- Cost to buy the non-current assets, and
2. All expenditures to bring to bring the non-current assets to a ready-to-use condition.
What are some examples of expenditures that are incurred to bring the non-current assets to a ready-to-use condition?
- Freight charges
- Import duties
- Legal fees
- Installation costs
Are the benefits provided by capital expenditure long or short term?
The benefits are long term. They last for more than one year.
Where is capital expenditure recorded?
In non-current assets account and shown in the Statement of Financial Position.
What is the journal entry for recording capital expenditure?
Dr Non-current asset
Cr Cash at Bank or Trade Payable
What do revenue expenditures consist of? Give some examples of revenue expenditures.
Revenue expenditures consist of:
- costs to operate or run the non-current assets, such as petrol and machine oil; and
- costs to repair and maintain the non-current assets in working condition.
Are the benefits provided by revenue expenditure long or short term?
The benefits last only for the current year.
How are revenue expenditures recorded?
In an expense account and shown in the Statement of Financial Performance.
What is the journal entry for recording revenue expenditure?
Dr Expense
Cr Cash at Bank
Why is it important to differentiate between capital and revenue expenditures?
Because non-current assets and profit for the year will be affected if the expenditure is wrongly classified.
Is the cost of a major overhaul of a truck a capital or revenue expenditure?
Capital expenditure because capital expenditures will generate benefits that will last for more than one year. As the overhaul has resulted in extension of the truck’s useful life, the cost of the major overhaul is a capital expenditure and is debited to the motor vehicles account.
Which of the following expenditures incurred to purchase a truck (with a useful life of five years) are capital expenditures? What is the journal entry for the capital expenditures?
a. $80 000 to Sumi Motor for a truck
b. $15 000 for certificate of entitlement (COE)
c. $5 000 to Fast Freight for bringing in the truck from Japan to Singapore.
d. $1 000 for road tax
e. $2 500 for petrol
f. $4 000 for maintenance
Items (a), (b) and (c). Therefore the total capital expenditure is $100 000 ($80 000 + $15 000 + $5 000).
The journal entry is:
Dr Motor vehicles $100 000
Cr Cash at bank $100 000
Which of the following expenditures incurred to purchase a truck (with a useful life of five years) are revenue expenditures? What is the journal entry for the revenue expenditures?
a. $80 000 to Sumi Motor for a truck
b. $15 000 for certificate of entitlement (COE)
c. $5 000 to Fast Freight for bringing in the truck from Japan to Singapore.
d. $1 000 for road tax
e. $2 500 for petrol
f. $4 000 for maintenance
Items (d), (e) and (f). The total revenue expenditures are
$7 500 ($1 000 +$2 500 + $4 000).
The journal entry is:
Dr Motor vehicle expenses $7 500
Cr Cash at bank $7 500
Why do some businesses treat capital expenditures as revenue expenditures, if the capital expenditures are immaterial?
Because it is in accordance with the materiality concept.
Mega Home and Eng Lighting are in the home furnishing industry. In the year 20X8, Mega Home made a profit of $900 000 and Eng Lighting made a profit of $9 000.
During the same financial year, both companies paid
$2 000 for a printer. How might Mega Home classify this expenditure? Is it okay for Mega Home to classify this expenditure as a revenue expenditure?
The printer is a capital expenditure as the benefits from this expenditure last for a few years. Thus, this amount should be recorded in the equipment account which is a non-current asset.
Mega Home may however record the expenditure as revenue expenditure as $2 000 is immaterial when compared to the size of the profit of the business. This is in accordance with the materiality concept.
Refer to Flashcard 16.
How may Mega Home record the amount?
As a revenue expenditure:
Dr Computer expense $2 000
Cr Cash at Bank $2 000
Refer to Flashcard 16.
How may Eng Lighting record the amount?
As a capital expenditure:
Dr Equipment $2 000
Cr Cash at bank $2 000
What does the materiality concept state?
A transaction or an item is considered material if it makes a difference to decision-making. The value of the transaction or item is usually compared to the size and nature of the business, in terms of income, profit, assets or equity of the business.
Is a business required to record a transaction or an item in accordance with the accounting principles and guidelines if the transaction or item is not material?
No, it does not need to. Thus, a capital expenditure may be recorded as a revenue expenditure if it is considered immaterial.
Can a capital expenditure be recorded as a revenue expenditure?
Yes, if it is considered immaterial, i.e. it does not make a difference to decision making.
Is this transaction or item material to a business that reports a profit of $1 million?
Purchase a piece of land for $500 000.
Material
Is this transaction or item material to a business that reports a profit of $1 million?
Incur repair cost for a delivery truck for $1 000.
Immaterial
Is this transaction or item material to a business that reports a profit of $1 million?
Incur painting of building for $300 000.
Material
Is this transaction or item material to a business that reports a profit of $1 million?
Purchase a tablet for $400.
Immaterial
Where is a capital expenditure recorded in?
Non-current asset account
Where is a revenue expenditure recorded in?
Expense account
What is the effect of wrongly classifying a capital expenditure item as a revenue expenditure?
Non-current assets will be understated.
Expenses will be overstated and hence profit will be understated.
What is the effect of wrongly classifying a revenue expenditure item as a capital expenditure?
Expenses will be understated and hence profit will be overstated.
Non-current assets will be overstated.
