Capital expenditure and revenue expenditure

WELCOME BACK. This week, we will continue our weekly presentation as we look at capital and revenue expenditure.

■ Capital expenditure

This is the expenses incurred to purchase long-term assets to be used by the business to enhance its operation. These include the purchase of furniture, buildings, and motor vehicles. All the expenses incurred to put the asset in a working condition are capital expenditure, including carriage, import duty, testing and installation charges, as well as legal charges.

■ Revenue expenditure

This is the expenses incurred to enable a business to carry out its day-to-day expenses, including paying electricity and telephone bills, rent, and motor vehicle repair expenses.

The distinction between capital and revenue expenditure is that revenue expenditure are expenses incurred to enable a business to carry out the day-to-day expenses, while capital expenditure is incurred to acquire assets/ funds for the business on a long-term period (i.e., that is a period of more than one year).

■ Joint expenditure

This is partly capital expenditure and partly revenue expenditure. For example, the purchase of a popcorn machine and a case of popcorn, salt and sugar. Capital expenditure = Purchase of popcorn machine

Revenue expenditure = popcorn, salt, and sugar

■ Loan and loan interest

Loan is a capital expenditure item, since it is used for expansion and purchase of fixed assets. Loan interest is paid periodically – for example, monthly or quarterly – and it becomes a part of the day-to-day expenses, therefore, it’s a revenue expenditure.

■ Capital receipts

This is when assets are sold; the proceeds received are known as capital assets.

■ Revenue receipts

This is income received by the business during the course of the year, including sales, commission received, discount received.

Given below is a list of various items of expenditure, with the type of expenditure and the reason for each:

When capital expenditure is incorrectly treated as revenue expenditure, the effect it has in the buyer’s books on: a. Net profit

Net profit would be understated. For example, purchase of motor vehicle at $60,000 is incorrectly charged to net profit as an expense. This will cause net profit to be understated by $60,000. b. Fixed assets

Fixed asset would be understated. As per example above: charging the $60,000 to net profit as an expense would mean no record in the fixed assets account, causing understating fixed assets by $60,000.

Various business transactions are given below, identifying the result of capital expenditure or revenue expenditure.

MULTIPLE-CHOICE QUESTIONS

Choose the MOST appropriate response. 1. Which of the following is a part of revenue expenditure? a. Painting the premises for three years. b. Buying tyres for a second-hand car. c. Painting the premises for the first time. d. Buying equipment for the building.

2. If Mary Jones owns a grocery store, which one of the following is NOT capital expenditure? a. Fixtures b. Equipment c. Rent d. Motor van

3. Capital receipts can be defined as: a. Proceeds for sale. b. Proceed for sale of fixed asset. c. Income from rented premises. d. Commission received.

4. Identify items of joint expenditure from the following: a. Purchase of light and petrol of the car. b. Purchase of TWO fixed assets during the year. c. Purchase and sale of equipment. d. Purchase of popcorn machine for business and purchase of salt.

Check your responses with the recommended ones given below.

Visit again next week for a presentation on Control Account.

This is all we have time for this week, but always bear in mind, you must get up each morning with renewed determination if you want to go to bed with full satisfaction. Never let what you cannot do stand in the way of what you can.