Capital expenditure | My Assignment Tutor

Handout Theory notes with examples Nidhi GogiaCAPITAL AND REVENUE EXPENDITURECapital expenditure occurs when a business spends money to:• Buy non- current assets• Add to the value of an existing non- current asset.This expenditure includes:• The costs of acquiring non- current assets• The costs of bringing non- current assets into the business• The legal costs of buying premises• The carriage inwards on machinery/ equipment purchased• Any other costs involved in preparing the non- current asset for use, e.g.installation costs• Upgrades to existing assetsEXAMPLE: Mark buys a new van for £20,000 for his flower delivery business. He fits thevan out with a basket unit costing £800. He puts his logo on the side of the van, whichcosts £500. Therefore, the total capital expenditure for his van is £______.Capital receipts are the sale of non- current assets. They should not be included inthe business’s revenue as they are not the sales in ordinary course of business. Thesetransactions should be recorded as cash or bank. Only the profit/ loss made on thesale of non- current assets should be included in the income statement.REVENUE EXPENDITURERevenue expenditure is expenditure that does not increase the value of non- currentassets but is incurred in the day to day running of the business. It can includepurchase of inventory, wages, heating and lightning. Revenue expenditures arerecorded in the income statement and impacts profit.The difference between capital and revenue expenditure can be explained whenconsidering the cost of purchasing and running a motor vehicle.• Buying a van is capital expenditure• Repairs to a van are revenue expenditure• The cost of petrol used to run a vehicle is revenue expenditureHandout Theory notes with examples Nidhi GogiaThe revenue expenditure is used up in few days and does not add value to the noncurrent asset.Revenue receipts are receipts from the normal trading activities of the business. Theyinclude selling inventory to customers. They are included in revenue on the incomestatement.Examples of Capital expenditure• Premises purchased• Legal charges for conveyancing• New machinery/ equipment• Installation of machinery• Additions to assets• Motor vehicles• Delivery charges on new assets• Extension costs of new offices• Cost of adding air cons to motor vehiclesExamples of Revenue expenditure• Rent of premises• Legal charges of debt collection• Maintenance of assets• Repairs to van• Carriage on purchases and sales• Redecorating existing offices• Interest on loan to purchase air cons.CASE STUDYMrs Hunt has recently opened a newsagent in London. She sells books and magazinesand some stationery. She also sells food and drink. Can you categorise the followingpurchases for her as capital and revenue expenditure?1. Purchase of magazines and books2. Purchase of shop fittings3. Purchase of cash registerHandout Theory notes with examples Nidhi Gogia4. Purchase of stationery5. Purchase of refrigerator


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