Capital & Revenue Expenditure
We will learn how to identify and calculate capital and revenue expenditure, and the recording in journals. We also learn how wrong accounting treatment of capital and revenue expenditure will affect profit for the year, assets and owner’s equity.
This topic is a prelude to the topic on Depreciation of non-current asset.
Related Lessons:
Accounting for Capital Expenditure
Capital expenditure refers to the cost incurred to acquire assets which benefit will last the business for more than one accounting period. Therefore, capital expenditure is recorded as Non-Current Assets.
To calculate the cost of capital expenditure,
Original purchase price – Discounts + Cost incurred to bring asset to usable state (e.g. installation cost, delivery cost)
Example:
Cost of air-conditioning $8,000
Discount 10%
Delivery cost $200
Installation cost $300
Total cost of capital expenditure = (8,000 x 90%) + 200 + 300 = $7,700
To record capital expenditure:
Dr Non-current asset
Cr Cash at bank or Other payable
When capital expenditure is wrongly recorded as revenue expenditure, the business expense will be overstated, which leads to profit being understated. The total asset and owner’s equity of the business will also be understated.
Accounting for Revenue Expenditure
Revenue expenditures are cost incurred to maintain the asset where the benefit will last the business for one accounting period. Therefore, it is recorded as an Expense.
The cost of revenue expenditure is the actual cost incurred.
Example:
Maintenance cost of air-conditioning $200
Total cost of revenue expenditure is therefore $200.
To record revenue expenditure:
Dr Expense
Cr Cash at bank or Cash in hand
When revenue expenditure is wrongly recorded as capital expenditure, the business expense will be understated, which leads to profit being overstated. The total asset and owner’s equity of the business will also be overstated.