Capital And Revenue Expenditure

CONTENT

• Definition of Capital and Revenue Expenditure
• Distinct between Capital and revenue expenditure
• Effects of Overstatement and Understatement of Capital and Revenue Eexpenditure
• Statement of Capital and Revenue Expenditure  

1. Capital Expenditure: Capital expenditure are payment made on items of capital nature. They are expenses which add to the value of fixed assets. Capital expenditure therefore can simply be described as the expenditure that consist of cost of fixed assets and other associated costs.

E.g:          (a) Cost of purchase    (b) Cost of delivery

                (c) Installation cost                 (d) Legal costs of purchase

                (e) Architect fees.       (f) Cost of demolition before new building is sited

                (g) Cost of inspection and test of fixed asset before use.

• Revenue Expenditure: Revenue expenditures are payments made on running the daily activities of  business enterprises. They are expenses which do not add to the value of fixed assets but are for maintenance and repairs of fixed assets and to generally run the business on daily basis.
• Eg:           (a) Cost of maintenance of fixed assets          (b) Cost of repairs

(c) Payment of rents and rates   (d) Payment of wages and salaries

(e) Cost of transportation etc.            

Distinction between Capital and Revenue Expenditure

CAPITAL EXPENDITURE                                                           REVENUE EXPENDITURE 

1. Capital expenditure consist of cost of      fixed assets and other associated cost.	Revenue expenditure consist of cost of maintenance or repairs of fixed assets
2. Capital expenditure are incurred in long term projects	Revenue expenditure are incurred daily weekly, monthly and yearly and are better describe as Recurrent
Capital expenditure are expenses that result in increases of value of fixed assets in the balance sheet	Revenue expenditure are expenses chargeable to the profit and loss accounts
Capital expenditure are made on capital items which are long term and have enduring influence on profit of the organization	Revenue expenditure are made on revenue items which are shore term and have a temporary influence on the profit of the organization

EFFECTS OF OVERSTATEMENT AND UNDERSTATEMENT OF CAPITAL AND REVENUE EXPENDITURE.

Capital and revenue expenditure when wrongly posted or interpreted or wrongly mistaken for each other, will have a great effect of overstatement or understanding on profit.

Example

Capital expenditure overstated has the following effect

1. Overstatements of profit because revenue expenditure must have been understand.
2. Overstatement of value of fixed asset

Revenue Expenditure understated has the following effects:

1. Understatement of profit
2. Understatement of value of fixed assets

STATEMENTS OF CAPITAL AND REVENUE EXPENDITURE

These are prepared to show the distinction between them mostly in government office.

Reading Assignment

Essentials Financial Accounting for S.S by A.O Longe  page 186-192

GENERAL EVALUATION QUESTIONS

1. State five reasons why organizations separate their operations into different departments
2. List six errors that will not affect the agreement of the trial balance
3. Explain four classifications of cost found in the preparation of manufacturing accounts
4. Explain the following (a) prime cost (b) work – in – progress (c) manufacturing profit
5. List five prime books of account used in recording financial transactions

WEEKEND ASSIGNMENT

1. Purchase of lubricant oil is an example of (a) Revenue expenditure  (b) Capital Expenditure  (c) Accrued Expenses  (d) Running cost
2. Purchase of Fixed Assets is an example of (a) running cost  (b) accrued expenses  (c) revenue expenditure  (d) capital expenditure
3. Revenue expenditure can better be described as (a) recurrent expenses   (b) ordinary expenses (c) general expenses (d) yearly expenses.
4. Revenue expenditure when understated has the following effects on the profit  (a) understatement of profit  (b) overstatement of profit  (c) set profit of equilibrium to expenses  (d) results in negative profit.
5. The followings are example of capital expenditure except _______  (a) cost of fixed assets   ( b) installation cost of equipments  (c) maintenance cost of assets  (d) delivery cost of fixed assets

THEORY

1. Define revenue expenditure and give ten example 
2. What is capital expenditure? Give ten examples.