Topic 3 - Capital and Revenue expenditure Flashcards
What is capital expenditure?
Money spent on non-current assets which will benefit the firm in the long term and are shown in the Statement of Financial Position.
What are the two different types of capital expenditure?
- Money spent to buy non-current assets and bring them to a working state
- Money spent to add to the value of existing non-current assets (improve, enhance, extend)
What are some examples of capital expenditure? (12)
- Cost of purchase
- Delivery costs to bring the asset to our premises
- Legal costs to purchase a non-current asset
- Installation, inspection & testing before use
- Painting the company logo on a product
- Initial staff training
- Architect fees
- Demolition costs to remove an old building in order to
build a new one - Modifications/improvements to the non-current asset
- Upgrades to existing assets
- Cost of adding air-conditioning to offices
- Legal charges for conveyancing*
- Work done (usually by a lawyer) to change the possession of property from one person to another
What is revenue expenditure?
Money spent on day-to-day expenses which will benefit the firm in the short run and are shown in the Income Statement.
What are examples of revenue expenditure? (5)
- Expenses (e.g. heating, power, insurance, operating
costs, rent, interest, wages) - Purchases of inventory
- Carriage inwards
- Consumables
- Legal expenses for debt collection
What are the differences between capital and revenue expenditure?
Check table page 3.
What does the incorrect treatment of capital expenditure as revenue expenditure result in?
- Profit for the year will be understated
- Non-current assets in the Statement of Financial Position will be understated
What does the incorrect treatment of revenue expenditure as capital expenditure result in?
- Profit for the year will be overstated
- Non-current assets in the Statement of Financial Position will be overstated
What is capital income?
Money received from the sale of non-current assets. It also includes capital introduced by the business owner and loans.
What is revenue income?
Money received from the sale of goods and services by a business and also any income from other secondary sources (e.g. rent, interest, commission receivable).
