Accounting 102: Capital and Revenue Expenditure

Businesses always spend money for diverse reasons. Some of it helps the business for many years, while other spending is used up quickly in daily operations. This is why accountants separate spending into two categories: capital expenditure and revenue expenditure.

This topic matters because the way spending is classified affects the Income Statement, the Statement of Financial Position, profit for the year, non-current assets, and capital. If a business records expenditure in the wrong place, the financial statements may give the wrong picture of the business.

Capital expenditure is spending on non-current assets in the Statement of Financial Position.

Capital expenditure is made when a firm spends money to either buy non-current assets, such as vehicles or equipment, or add to the value of an existing non-current asset, such as upgrading a machine or improving equipment.

Capital expenditure should include amounts spent on buying the asset itself, also known as acquiring non-current assets, bringing the asset into the firm, legal costs of buying buildings including land, carriage inwards on machinery bought, and any other cost needed to get the non-current asset ready for use.

Examples of capital expenditure include the purchase price, delivery costs, and installation costs.

Capital expenditure is always recorded as a non-current asset. It does not go directly as an expense in the Income Statement.

It appears in the Statement of Financial Position because the business benefits from it for more than one accounting period.

Revenue expenditure is basically expenses in the Income Statement. It is expenditure that is not for increasing the value of non-current assets.

Revenue expenditure is money used for the daily running of the business and is known as payment for expenses.

For example, buying a motor van is capital expenditure. The motor van will be in use for several years and is, therefore, a non-current asset.

However, paying for petrol to use the motor van you purchased for the next few days is revenue expenditure. This is because the expenditure is used up in a few days and does not add to the value of non-current assets.

Other examples of revenue expenditure include rent, wages and salaries, electricity, and advertising.

Revenue expenditure is included in the Income Statement because it reduces the profit for the year. It is used up in the current accounting period.

Capital expenditure gives a long-term benefit, is recorded as a non-current asset, and is shown in the Statement of Financial Position. For instance, buying machinery is capital expenditure.

Revenue expenditure gives a short-term benefit, is recorded as an expense, and is shown in the Income Statement. For instance, repairing machinery is revenue expenditure.

Capital receipts are amounts received from any source other than the normal activities of the business. For instance, selling non-current assets, receiving a loan, or capital being introduced to the business are all capital receipts.

Revenue receipts are amounts received from the normal trading activities of the business, such as sales of goods and other revenue. They can also come from providing a service.

Examples of revenue receipts include sales revenue and commission received.

Capital receipts are not from normal trading activities and are usually connected to long-term assets or financing.

Revenue receipts are from normal business activities and are included in the Income Statement.

A common mistake is treating repairs as capital expenditure or treating improvements as repairs.

Another common mistake is confusing buying an asset with maintaining an asset, or confusing selling goods with selling a non-current asset.

If revenue expenditure is treated as capital expenditure, profit for the year, or net profit, will be overstated. Non-current assets will also be overstated, and capital will be overstated.

If capital expenditure is treated as revenue expenditure, expenses will be overstated. Profit for the year, or net profit, will be understated. Non-current assets will be understated, and capital will be understated.

1. 1Ask whether the spending gives a long-term benefit or short-term benefit.
2. 2Check whether the spending is used to buy or improve a non-current asset.
3. 3Record capital expenditure as a non-current asset in the Statement of Financial Position.
4. 4Record revenue expenditure as an expense in the Income Statement.
5. 5Check whether money received came from normal trading activities or from another source.
6. 6Classify normal business income as revenue receipts.
7. 7Classify receipts from selling non-current assets, loans, or owner capital as capital receipts.

• Treating repairs as capital expenditure.
• Treating improvements as repairs.
• Confusing buying an asset with maintaining an asset.
• Confusing selling goods with selling a non-current asset.
• Recording capital expenditure directly as an expense.
• Recording revenue expenditure as a non-current asset.

• Capital expenditure is spending on non-current assets.
• Capital expenditure is shown in the Statement of Financial Position.
• Revenue expenditure is used for the daily running of the business.
• Revenue expenditure is shown as an expense in the Income Statement.
• Capital receipts come from sources other than normal trading activities.
• Revenue receipts come from normal business activities.
• If revenue expenditure is treated as capital expenditure, profit will be overstated.
• If capital expenditure is treated as revenue expenditure, profit will be understated.