Capital and Revenue Expenditure and Income Essay
Capital and Revenue Expenditure and Income
What is Revenue and Expenditure?
In accounting, one must keep record of all revenue and expenditure made by the business. Revenue is essentially the income of the company itself over a certain amount of time. This may be obtained through sales or providing services to customers. Expenditure is the payment of cash or goods made by the company to purchase stock and assets or to pay off debts. What Is the Difference between Capital Income and Revenue Income? There are two types of income; capital income and revenue income. Capital income is the money invested by owners to set up the business and to buy fixed assets such as property and machinery, fixed assets are expected to stay in the company for a long period of time. Revenue income is the money brought into the business by the selling of goods and services. The sources of both capital and revenue income depends on the type of business that is being run.
In regards to capital income, the source can depend on the ownership of the company. If one person owns the business, it is known as a sole trader and capital income can be invested by the owner themselves or can be sought from banks in the form of a loan. Banks may be more reluctant to provide large cash sums to sole traders as it falls on only them to repay the bank, and therefore the size of the company may be restricted due to the restricted funds available. This type of ownership involves quite large risks as the owner does not have limited liability and must take responsibility of all financial aspects of the business, including any debts not being able to be paid. If the business fails and a loan has been taken out from the bank, any assets that the owner used to secure the loan can be taken as payment. One advantage of being a sole trader is that the owner is able to keep all net profits for themselves, as well as practicing full control of the business themselves.
Businesses set up by partners are quite similar to sole traders in that it is still a high risk option as both partners use their own personal savings and personal assets as loan securements. Partnerships may be at a better advantage in regards to less restrictions on the size of the business due to more money and resources being available. On the other hand, profits must be split between both partners equally. There is also the risk of partners falling out over decisions and individuals’ actions which could jeopardise the business. A different type of business is a shares company. This is a business in which an unlimited amount of investors can own parts of the company. Shareholders retain voting rights in regards to how the company is run. Individual shareholders have the opportunity to exercise more control by obtaining larger proportions of the company shares. Shareholders are paid in dividends which is a share of the profits. Less risk is involved here but there is less profit and control for owners.
Capital income from banks come in the form of either loans or mortgages. Loans are a sum of money provided by a bank and are to be repaid at a set amount each month. On top of the loan, an interest rate also has to be paid. Interest rate is a charge set by the bank on the loan and is a percentage of the loan itself. Not only are loans expensive, but many business owners have to use their own personal assets to secure one as a sign of good faith in their idea and to reduce the risk to the bank. Banks can claim assets if the business fails so that they don’t lose out on money. A mortgage is a larger loan provided by banks in order to purchase land and premises. It is paid back after about 25 years and is also secured by assets.
Revenue income depends on the type of business and there are three main types: sales, rent and commission. Sales revenue is the money coming in from sales turnover from the selling of goods or services. It is dependent on the price set on goods and how many customers are buying them. They can be paid by either cash or credit; paying by credit means the money is given at a later date. Some business receive rent by charging people to rent out their property so they can collect payments on it.
Other companies sell goods on behalf of another company and collect a percentage of each sale, this is called receiving commission. What is the Difference between Capital Expenditure and Revenue Expenditure? Expenditure is the amount of money coming out of a business. It can be categorised as capital expenditure or revenue expenditure. Capital expenditure is when fixed assets are bought into the company, these are called capital items. Revenue expenditure is money being spend on items used on a regular basis such as buying stock to sell or paying staff payslips.
Capital items bought by capital expenditure are fixed assets and intangible assets. Fixed assets are long-term items such as building and machinery. These items lose value over time and are therefore depreciated. To depreciate something means to reduce its value on the balance sheet so that it has a fair and accurate value. Intangibles are assets that cannot be touched but are still beneficial to the business. If a company were to be bought over, its good reputation and customer base would be bought with it. This is known as goodwill and automatically adds to the value and selling price of the business. Patents are legally protected inventions within the company. For example a company could invent a piece of software, if the company were to obtain a patent they could ask for a higher price on their product. A trademark is something that makes a business unique. Customers may recognise trademarks of a company and feel loyal to it, which in turn may entice them to pay more for the product or service being sold.
Revenue expenditure common to most businesses include: premises costs, admin costs, staff costs, selling and distribution costs, finance costs and purchase of stock. Businesses renting out or owning properties must pay in order to do so. Businesses renting pay regular amounts of money to continue usage of the property. Privately owned premises require non-domestic rates to be paid. This is determined by the size, location and nature of business and goes towards the local council. It pays for services such as street lighting and bin collections. Businesses are also legally required to pay a number of insurances to protect itself from potential losses. These include; building insurance, this protects the actual building from accidents such as fires or floods; contents insurance which protects all objects within the building in case of damage; and public liability insurance which protects any people that may be hurt or injured whilst inside the building. Businesses must also pay for heating and lighting, usually quarterly, to continue using these services.
There is a lot of paperwork that goes on internally and externally with business. Related costs include posting out items, any stationary such as paper, staplers or books. It also covers the costs of telephone bills. There are a number of staff costs that must be paid out, the size of cost will be influenced by the businesses dependence on staff compared to machinery. A business with large numbers of staff is called labour intensive whereas a business with more machinery is called capital intensive. Salaries and wages must be paid out to all staff. Salaries are an annual amount paid monthly to each employee. Wages are the rate of hourly payments. They offer more flexibility for the staff and employer. Businesses have to pay out employers’ liability insurance to cover any compensation claims in case of an employee being injured at work.
Some businesses offer different bonuses to employees. This may be training to become better at specific jobs although this could be expensive and take employees away from work for long periods of time. Businesses may also offer pension schemes in which both the employee and the employer contribute towards. Employers will find that there are costs involved in the selling of their products. For example they must pay carriage costs to have their product delivered and then the salaries of staff to sell this product. It is also beneficial to pay for the promotion of their products to create an awareness of them for potential customers.
Banks also run like businesses and must therefore sell their services for a profit. Business owners will find that all transactions also incur a cost from the banks, e.g. cash being withdrawn or paid in. Any loans or mortgages taken from the bank will also take on interest which means the business is paying back more than it originally borrowed from the bank. Before a trusting relationship is built between the business and suppliers, the business can expect to pay full price on all stock. After a while, discounts or the ability to buy stock on credit may be achieved.