1. Capital expenditure and revenue expenditure

BB001 - Accounting Practice – Lecture 6

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1. Capital expenditure and revenue expenditure

Expenditure

Capital Expenditure Revenue Expenditure

 Buy fixed assets  Expenses for running

the business on a day- Add to the value of

to-day basis

existing fixed assets

 Cost incurred does not

 Eg. Buying fixed asset

increase value of fixed

 Legal cost on buying

asset

building

 Cost used up in a short

 Carriage inwards on

time

machinery bought

 Cost directly incurred to

bring fixed asset to use

for the first time

 Cost of improvement

(making fixed assert

superior than it was

when first owned)

Balance sheet Profit and loss account

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BB001 - Accounting Practice – Lecture 6

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Difference between capital and revenue expenditure

Expenditure Type of Expenditure

Buying van Capital

Petrol costs for van Revenue

Repairs to van Revenue

Putting extra headlights on van Capital

Buying machinery Capital

Electricity costs of using machinery Revenue

We spent ₤1,500 on machinery: ₤1,000 was for an

Capital ₤1,000

item (improvement) added to the machine; and ₤500 Revenue ₤500

was for repairs

Paiting outside of new building Capital

Three years later – repainting outside of building Revenue

1.1. Loan Interest

Loan interest = revenue expenditure

Loan interest is not the

cost of acquiring the

assets; it is a cost of financing its acquisition

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BB001 - Accounting Practice – Lecture 6

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1.2. Joint Expenditure

Repair expenses

Capital Expenditure

 Enhancement

 Improvement

Revenue Expenditure

 Replacement

 Repairs

 Maintenance

Example

Repair expenses - ₤3,000

(₤2,000-improvements to building)

(₤1,000-repairs on building)

₤2,000 Capital

Expenditure

₤1,000 Revenue

Expenditure

Building Account

(General Ledger)

Repairs Account

(General Ledger)

Profit and Loss Account

(Expense)

Balance Sheet

(add to existing total

value of Building)

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BB001 - Accounting Practice – Lecture 10

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