ZIMSEC O Level Principles of Accounts Notes: 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.

 

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