Chapter 9 - Accounting For Capital Transactions Flashcards
Capital transactions
Capital transactions concern all aspects of non current assets - through purchasing, control and final disposal
Because of the nature of non current assets - their high cost and long term use within the business - management needs to keep careful control over capital transactions at the appropriate level. For example the purchase of a £500,000 computer system will be authorised by senior management and the purchase of new waste paper baskets for the office of £100 will be authorised by the office supervisor.
Acquisition
The cost of the non current asset is entered in the journal as a debit and bank/cash is credited in the journal.
Depreciation
Depreciation charges are recorded in the journal as a debit. Accumulated depreciation is credited. Statement of profit or loss is debited in the journal and depreciation charges are credited for the transfer to three statement of profit or loss.
Disposals
The double entry transactions are made up from the transactions in the journal
Capital expenditure
Capital expenditure is expenditure incurred on the purchase, alteration or improvement of non current assets.
Included in capital expenditure are directly attributable costs such as:
Delivery of non current assets
Installation of non current assets
Improvement of non current assets
Capital expenditure is always subject to the application of the materiality principle
Revenue expenditure
Revenue expenditure is expenditure incurred on running expenses
Included in revenue expenditure are the costs of:
Repair, maintenance and servicing of non current assets
Administration and general overheads of the business
Selling and distributing the goods or prouducts in which the business trades
Capital and revenue expenditure - the differences
Capital expenditure is shown on the statement of financial position, while revenue expenditure is an expense in the statement of profit or loss.
Acquisition and control of non current assets
Because of the large amounts of money involved the acquisition of non current assets is monitored and controlled by the business. It will have to be approved by the business managers or owners or by a committee which decides if it will be approved.
Authority for capital expenditure
A business that wishes to purchase the non current asset must submit an application for capital expenditure to the appropriate level of management
Monitoring and control
Once authorisation has been granted for a particular project it is important that the actual costs are monitored and controlled against the costs in the original application.
The use of a non current asset register
This records non current assets by separating out each class out of a non current asset and records the details of each asset owned.
IAS 16: property, plant and equipment
This requires that depreciation is charged on all non current assets. Depreciation methods should also be reviewed annually in to make sure the business is using the most appropriate one.
