Section 6 of 12
Capital expenditure — spending on non-current assets or costs that provide a benefit lasting more than one year.
Revenue expenditure — spending on the day-to-day running of the business; costs consumed within one accounting period.
| Capital expenditure | Revenue expenditure |
|---|---|
| Purchasing machinery, vehicles, buildings | Wages, rent, electricity, insurance |
| Installation and delivery costs of a new asset | Repairs and maintenance of existing assets |
| Legal costs of buying a property | Advertising, printing, telephone |
| Extensions or improvements to existing assets | Annual road tax on a vehicle |
Boundary cases to remember:
| Expenditure type | DR | CR |
|---|---|---|
| Capital expenditure | Non-current asset account | Bank / Trade payables |
| Revenue expenditure | Expense account (e.g. motor expenses) | Bank / Trade payables |
| Error | Effect on profit | Effect on statement of financial position |
|---|---|---|
| Revenue treated as capital (should be expense, recorded as asset) | Profit overstated (expense missing from income statement) | Assets overstated (asset shown that should not be there) |
| Capital treated as revenue (should be asset, recorded as expense) | Profit understated (expense charged that should not be) | Assets understated (asset missing from SFP) |
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