Capital and revenue expenditure

Question 1

Define capital expenditure.

Answer 1

Capital expenditure consists of the cost of buying a non-current asset and all expenditures to bring the non-current assets to a ready-to-use condition.

Question 2

Define revenue expenditure.

Answer 2

Revenue expenditure consists of the costs to operate the non-current assets and the costs to repair and maintain the non-current assets in working condition.

Question 3

Explain 2 differences between a capital expenditure and a revenue expenditure.

Answer 3

Capital expenditure

• Provides benefits that last for more than one year
• Recorded as a non-current asset in the Balance Sheet

Revenue expenditure

• Provides benefits that are used up within the year
• Recorded as an expense in the income statement

Question 4

State and explain the accounting principle applied when classifying an item as capital and revenue expenditure.

Answer 4

The materiality concept is applied.

• If an item is deemed to be significant(material) in cost, it will be treated as a capital expenditure.- If an item is deemed to be insignificant in cost, it will be treated as a revenue expenditure.

Question 5

State the effects of wrongly classifying a capital expenditure as a revenue expenditure.

Answer 5

1) Expenses will be overstated, therefore profit will be understated
2) Non-current assets will be understated