CAPITAL EXPENDITURE
-The costs incurred on the acquisition of a fixed asset and any subsequent expenditure that increases the earning capacity of an existing fixed asset.
-The purpose of capital expenditures is commonly to expand a company's ability to generate earnings.
-It appears as an asset on a company's balance sheet
- INCREASE THE VALUE OF FIXED ASSET
- BUYING A FIXED ASSET
- INCLUDED ON BALANCE SHEET
- THEY ARE PURCHASE TO GENERATE PROFIT FOR BUSINESS
- IMPROVEMENT OF THE FIXED ASSET
REVENUE EXPENDITURE
-The costs that are aimed at 'maintaining' rather than enhancing the earning capacity of the assets. It is incurred in the day-to-day running of the business.
-The purpose of revenue expenditures are more commonly for the purpose of maintaining a company's ability to operate.
-It appears with business's liabilities.
- FINACE DAY-TO-DAY EXPENSES
- REPAIR OF FIXED ASSET
- INCLUDED IN EXPENSES IN P&L ACCOUNT
- DOES NOT INCREASE THE VALUE OF FIXED ASSET
- REDUCED NET PROFIT
The difference between CAPITAL and REVENUE can be seen when considering the cost of purchasing and running a car.
The expenditure incurred in buying a car is the CAPITAL expenditure, whereas the cost of running a car (Petrol/Tax) is the REVENUE expenditure
Sometimes an item of expenditure will need dividing between capital and revenue expenditure, this is called JOINT expenditure.
For example, Regents have just recently built a new building and repair the primary building.
The total cost was $100,000.
It costs $80,000 to build the new building and $20,000 was spent on a repairing the primary building.
The $80,000 is CAPITAL expenditure.
The $20,000 is REVENUE expenditure.
EXAMPLE
Purchase of new premises
Insurance of premises
Installing/Testing an air conditioning system
Repairs to premises roof
Payment of staff wages
Additional capital invested by the owner
Purchase of new workshop lift
CAPITAL EXPENDITURE
REVENUE EXPENDITURE
CAPITAL EXPENDITURE
REVENUE EXPENDITURE
REVENUE EXPENDITURE
NEITHER
CAPITAL EXPENDITURE
THE EFFECTS OF INCORRECT TREATMENT OF CAPITAL & REVENUE EXPENDITURE ON A BUSINESS
CAPITAL EXPENDITURE AS REVENUE EXPENDITURE
- TOTAL FIXED ASSET WOULD DECREASE
- TOTAL EXPENSES WOULD INCREASE
- NET PROFIT ON P&L ACCOUNT WILL BE UNDERSTATED
- NET ASSET ON BALANCE SHEET WILL BE UNDERSTATED
REVENUE EXPENDITURE AS CAPITAL EXPENDITURE
- TOTAL FIXED ASSET WOULD INCREASE
- TOTAL EXPENSES WOULD DECREASE
- NET PROFIT ON P&L ACCOUNT WILL BE OVERSTATED
- NET ASSET ON BALANCE SHEET WILL BE OVERSTATED
CAPITAL RECEIPTS
When an item of capital expenditure is sold
REVENUE RECEIPTS
Sales or other revenue items (rent, receivable,commission receivable)