Capital & Revenue Expenditure (Cambridge International IGCSE Accounting)

Capital & revenue expenditure

What is capital expenditure?

• Capital expenditure is money that is spent on non-current assets for the long-term benefit of the business

• Capital expenditure includes:

  • The purchase of non-current assets

  • The delivery of non-current assets

  • The installation of non-current assets

  • The legal costs incurred with the non-current asset purchases

  • The decoration of new non-current assets

  • The extension of non-current assets

    • e.g. increasing the size of a storage warehouse

• Capital expenditure is included in the statement of financial position under the non-current assets section

  • It is not included in the income statement

What is revenue expenditure?

• Revenue expenditure is money that is spent on the day-to-day running costs of the business

• Revenue expenditure includes:

  • The purchase of goods for resale
  • General expenses
  • Insurance
  • Training costs
  • Repairs of non-current assets
  • Redecoration of existing non-current assets

• Revenue expenditure is included in the income statement

  • It is not included in the statement of financial position
  • However, it will contribute to the profit or loss for the year, which is recorded in the statement of financial position

Worked Example Ajax buys a new vehicle. The following table shows the payments Ajax has made.

	$
Cost of the vehicle	27 500
Delivery cost of the vehicle	300
Insurance	800
Fuel costs	400

How much is the capital expenditure?

Answer:

Identify whether each cost contributes to revenue expenditure or capital expenditure

	Type of expenditure
Cost of the vehicle	Capital
Delivery cost of the vehicle	Capital
Insurance	Revenue
Fuel costs	Revenue

Add together the costs that contribute to capital expenditure

$27 500 + $300 = $27 800

Effects of incorrect treatment of expenditure

What are the effects of treating capital expenditure as revenue expenditure?

• Incorrectly treating capital expenditure as revenue expenditure will affect the financial statements

• It will incorrectly appear as an expense on the income statement

  • The expenses will therefore be overstated
  • This means the profit for the year will be understated

• It will not appear as a non-current asset on the statement of financial position

  • The non-current assets will therefore be understated
  • The capital will be understated because of the understated profit

What are the effects of treating revenue expenditure as capital expenditure?

• Incorrectly treating revenue expenditure as capital expenditure will affect the financial statements

• It will not appear on the income statement

  • The expenses will therefore be understated
  • This means the profit for the year will be overstated

• It will incorrectly appear on the statement of financial position

  • The non-current assets will therefore be overstated
  • The capital will be overstated because of the overstated profit

How do I treat low-valued non-current assets?

• Some non-current assets have a small cost to the business

  • Calculators
  • Staplers
  • Waste bins

• The accounting principle of materiality means that a business should treat these items as expenses rather than non-current assets

  • These will appear on the income
  • These will not appear as non-current assets on the statement of financial position

Worked Example Ajax paid $2 000 for installation costs of new equipment. He treated this as revenue expenditure.

Describe what effects this will have on the financial statements. Ignore any depreciation costs.

Answer:

The $2 000 has been incorrectly posted to the income statement as an expense. Therefore, the expenses are overstated by $2 000 which means the profit is understated by $2 000.

The $2 000 has been omitted from the statement of financial position. Therefore, the non-current assets are understated by $2 000. The capital is also understated by $2 000 because the profit has been understated.