Cambrige Notes: Principles of Accounting: Accounting for Capital and Revenue Expenditure

• Now that we have explained the differences between capital and revenue expenditure
• It is time to look at how these are recorded in the books
• Obviously the treatment is not the same

Accounting Treatment of Capital Expenditure

• Capital expenditure must be recorded in the General Ledger usually as an non current asset
• Typical entries are:
  1. To record the purchase of an asset:
     1. Dr Asset Account with the total amount of the purchase
     2. Cr Cash/Bank/Creditor’s Account
  2. To record Additional Expenses:
     1. Dr Asset Account
     2. Cr Cash/Bank or Creditor’s Account
• The balances of capital expenditure account are shown in the Statement of Financial Position at the end of each period
• Only a portion of this expenditure is transferred to the Income Statement/Profit and Loss Account
• This portion usually relates to depreciation and represents a portion of the non current asset that has been “consumed” or used up in generating revenue for the current period

Accounting treatment of Revenue Expenditure

• Capital expenditure recorded in the various ledgers depending on their nature
• For example credit purchases are recorded in the Purchases Ledger
• Rent is recorded in the General Ledger etc
• At the end of each period the total expenses for the period are charged against revenue for the period in the Profit and Loss Account and appear as expenses in the Income Statement
• Typical entries are:
  1. To record rent paid for the period:
     1. Dr Rent Expense Account
     2. Cr Cash or Bank
  2. At the end of the period transfer the rent amount to the profit and loss account:
     1. Dr Profit and Loss Account
     2. Cr Rent Expense Account

Effects of incorrect classification and treatment

• Since their accounting treatment is different failure to properly classify and record profit has an effect on profit
• Treating capital expenditure as revenue expenditure will:
  • Result in the understatement of non-current assets and
  • Reduce the profit figure resulting in it being understated
• Treating revenue expenditure as capital expenditure will:
  • Result in non current assets being overstated
  • Profit for the period being overstated

To access more topics go to the Principles of Accounting Notes.