Topic 3: Capital and Revenue expenditure Flashcards
What is CAPITAL EXPENDITURE?
capital expenditure is money spent on NON-CURRENT ASSETS that will help benefit the firm in the long run (Beyond the current accounting period) and will help generate profits for the future
What does CAPITAL EXPENDITURE include?
Buying NON-CURRENT ASSETS + Brining them to a working state (Ready for use)
Adding to the value of exisiting NON-CURRENT ASSET (Improve , enhance , extend)
Give Examples of CAPITAL EXPENDITURE.
Cost of purchase
Delivery costs to bring asset to our premises
Legal costs to purchase a non-current asset
Installation, inspection and testing before use
Initial staff training
Upgrades to existing assets
What is REVENUE EXPENDITURE?
revenue expenditure is money spent on everyday operating expenses. This expenditure will be used up/consumed within the current accounting period
Give Examples of REVENUE EXPENDITURE.
Heating
Power
Operating costs
Insurance
Rent
Interest on loan
wages
maintenence and servicing of non-current assets
Why is the maintenance and servicing of non-current assets classified as revenue expenditure?
These expenses are incurred to keep assets in their current operational condition without enhancing their value or extending their useful life.
Compare and Contrast Capital and Revenue Expenditure.
CAPITAL EXPENDITURE includes Buying or improving a non-current asset while REVENUE EXPENDITURE includes paying for operational running expenses
CAPITAL EXPENDITURE benefits the firm (helps genrate more profit) for over a year (long term) while REVENUE EXPENDITURE benefits the company (helps genrate more profit) for less than a year (short term)
CAPITAL EXPENDITURE is recorded as a non-current asset in the statement of financial position while REVENUE EXPENDITURE is recorded as an expense in the income statement
The incorrect treatment of capital expenditure as revenue expenditure results in:
Profit of the year will be understated
Non-Current assets will be understated
The incorrect treatment of revenue expenditure as capital expenditure results in:
Profit of the year will be overstated
Non-Current assets will be overstated
Where would Joint expenditure be needed?
when paying somone. e.g. A builders bill for 2000 will include 500 for repairs which is revenue expenditure and 1500 for improvements which is capital expenditure
What is JOINT EXPENDITURE?
it is the inclusion of both capital and revenue expenditure.
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 form another secondary sources
Examples of REVENUE INCOME.
rent receivable
interest receivable
commission receivable
Where is REVENUE and CAPITAL INCOME recorded?
In the income statement
What is another name for CAPITAL and REVENUE INCOME.
capital receipts
revenue receipts
