Principles of Accounting: Capital and Revenue Expenditure

• In accounting it is paramount to separate between revenue and capital expenditure
• Naturally all business expenditure can be classified as either revenue or capital expenditure

Capital Expenditure

• Capital expenditure is not to be confused with the capital account or capital in general
• Capital expenditure is when a business spends money to either:
  • Buy a fixed asset or
  • Add value to an existing fixed asset
• It would thus include the following:
  • the cost of acquiring fixed assets i.e. the purchase price of the fixed asset itself
  • the cost of bringing the fixed asset into the business e.g. carriage inwards, loading and unloading costs, import duty etc
  • The legal costs of buying buildings
  • Any other cost incurred to get a fixed asset ready for use for example installation and tuning costs
• Visit this topic to learn about the accounting treatment of capital expenditure

Revenue expenditure

• Expenditure which is not spent on increasing the value of fixed assets, but on running the
  business on a day-to-day basis
• Examples would include:
  • Fuel costs
  • Repainting a building
  • Art resotration
  • Purchases
  • Rent payments
  • Wages and Salaries
  • Advertising costs
  • Selling and Distribution costs
  • Administration costs etc
• Visit this topic to learn more about the accounting treatment of revenue expenditure

Joint expenditure

• It is not at all uncommon for a single sum spend to include both revenue and capital expenditure
• For example a business hires a construction company to restore and extend its premises
• In such instances an endeavor must be made to separate those costs that can be classified as revenue expenditure and those to be deemed as capital expenditure
• Once this is done the cost can be treated according to their nature

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