Capital Expenditure and Revenue Expenditure Essay
Capital Expenditure and Revenue Expenditure
Revenue expenditure is an expenditure which on cost of doing business on day to day basis and is necessary to be cover to maintain the business going on effectively. Thus, revenue expenditure is the cash or credit that being spent immediate for short-term purpose, example, expenses on assets such as repair and fuel which will or will not improve the value of the given assets.
Capital expenditure is an expenditure which will cause future benefit to the company. It’s the money that spends on the fixed assets or improves the value of existing assets which will increase the company’s strength to pull in profit or higher performance level. Unlike revenue expenditure, capital expenditure is more to an investment than a cost, since it create better business for the company. (Stolowy and J.Lebas 2006, p 234)
Capital expenditure is expenditure on fixed assets or increasing their earning capacity. Meanwhile, revenue expenditure is to maintain their earning capacity. The difference being that capital expenditure increase the earning capacity, long-term and produce future benefits, while revenue expenditure maintain the earning capacity, short term and produce immediate benefit. (ACCA F3 2009)
Capital expenditure defined as expenditure on purchase or improvement of non-current assets. For example that purchases a van to deliver the goods. Other example such as:- -Delivery of fixed assets-Legal cost of buying property
-Installation of fixed assets-Demolition costs
-Improvement (but not repair) of fixed assets
Revenue expenditure defined as expenditure on running or management of business, example, cost of fuel or diesel for vans. Other example such as:-
-Maintenance of fixed assets
-Administration of business
-Selling and distribution expenses
The main difference between the two forms of expenditure is that effect it has of the financial statement of business as the Balance Sheet and the Income Statement. Revenue expenditure affects in the income statement since it is fully consume within the period or carry forward to the next period as left over.
Capital expenditure improve the net book or obtain value of an asset or getting a new asset on the books. It is a long term expenditure and will be wrong to be set off as an expense in the current period. It is because that that fixed asset will pull in profit to the company for more than one year or accounting period. We can spread the cost of the asset over those accounting period in the form of depreciation since the fixed asset is used for several accounting periods. (Spiceland, Thomas, Herrmann 2009, p308 and p309)
Revenue expenditure shown on the income statement as an expense while capital expenditure treated as fixed asset on the balance sheet. It is necessary to classify these expenditure accurately in the accounting system to avoid uncertain errors. For example, if cost of a van was treated as an expense in the income statement, this will affect the net profit to be reduced; in the meantime the value of the van (fixed asset) will not show on the balance sheet. Hence, incorrect treatment of these expenditure will result:- (Wood 2012, p277) Capital expenditure – treated as – Revenue expenditure
Income Statement Balance Sheet Expenses increaseNet profit decreaseFixed assets decrease.
Revenue expenditure – treated as – Capital expenditure
Income Statement Balance Sheet Expenses decreaseNet profit increaseFixed assets increase.
Inappropriate asset classification can skew the financial position and profit of a business. Thus, it’s necessary to classify assets correctly and accurately. Decent classification of the expenditure maintains the fundamental accounting assumption of accrual, reasonable presentation and accuracy of presentation.