DOCSLIB.ORG

Chapter 3 Capital Expenditure and Revenue Expenditure

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Chapter 3 Capital Expenditure and Revenue Expenditure Chapter 3 Capital Expenditure and Revenue Expenditure When preparing final accounts it is important to distinguish between capital and revenue expenditure. Capital expenditure can be defined as expenditure incurred on the purchase, alteration or improvement of fixed assets. For example, the purchase of a car to be use to deliver goods is capital expenditure. Included in capital expenditure are such costs as: Delivery of fixed assets; Installation of fixed assets; Improvement (but not repair) of fixed assets; Legal costs of buying property; Demolition costs; Architects fees; Revenue expenditure is expenditure incurred in the running / management of the business . For example, the cost of petrol or diesel for cars is revenue expenditure. Other revenue expenditure: Maintenance of Fixed Assets; Administration of the business; Selling and distribution expenses. Capital Expenditure is shown on the Balance Sheet, while Revenue Expenditure is an expense in the Profit and Loss account. It is important to classify these types of expenditure correctly in the accounting system. For example: if the cost of the car was shown as an expense in the Profit and Loss account, then the net profit would be reduced, meanwhile, the Balance Sheet would not show the car as a Fixed Asset. Therefore, incorrect treatment of expenditure will result: 1 Capital Expenditure treated as Increase Expenses Decrease in Fixed Assets Revenue Expenditure Decrease Net Profit in the Balance Sheet 2 Revenue Expenditure treated as Decrease Expenses Increase in Fixed Assets Capital Expenditure Increase Net Profit in the Balance Sheet. Only by allocating capital expenditure and revenue expenditure correctly between the Profit and Loss account and the Balance Sheet can the Final Accounts reflect accurately the financial statement of the business. The chart below shows the main items of capital expenditure and revenue expenditure associated with three major fixed assets – buildings, vehicles and computers. Pg . 25 Capital Expenditure Revenue Expenditure Buildings cost of building general maintenance cost of extension repairs carriage on raw materials used redecoration the new building legal fees labour cost of own employees to build new premises installation of utilities in the new premises e.g. water and electricity. Vehicles net cost, including any optional extras fuel delivery costs road licence number plates painting company logo licence for the new vehicle insurance any changes to the vehicle that servicing and repairs increases its value. Computers net cost discs installation and testing printing paper modifications, including memory insurance upgrades, low cost computer programmes installation of special wiring cost of air conditioning staff training computer programmes (if the cost of such programmes is high) Pg . 26 Exercises 1a. Explain briefly the distinction between Capital and Revenue Expenditure. 1b. State whether the following transactions of a Sports Club should be classified as Capital Expenditure or Revenue Expenditure: i. The redecoration of the club premises. ii. The installation of a new wine bar. iii. The building of an extension to the club dressing rooms. iv. The purchase of wine and spirits. v. The purchase of a record player for use in the club lounge. 2. Mario Abela decided to modernise his premises so that more customers would be attached and so that the work could be carried out more efficiently. During the year ended 30 April 1999, the following took place: (a) An extension to the office was built, Lm15,600 was paid for materials, and Lm22,340 for labour. Lm125 was paid for legal fees for permission to extend building. (b) The original premises were redecorated Lm2,600. (c) A new, powerful computer was purchased to process the office’s accounts and other administration. The computer cost Lm5,300. (d) 50 new smaller computers were purchased at a total cost of Lm97,600 and sold to customers. (e) The original premises had some old electrical wiring renewed at a cost of Lm1670, and some additional power points installed at a cost of Lm760, so that more computers could be demonstrated to customers. (f) Other running expenses for the year totalled Lm67,400. You are required to classify the above transactions under Capital expenditure and Revenue Expenditure. 3. Lorry Ellul buys new machinery on 1 November 1999 for Lm10,000. He pays for this by taking out a bank loan, for which he is charged Lm1,200 interest during the year ended 31 October 1999. The installation of the machinery cost him Lm450 for labour and Lm75 for materials. As the machinery is specialised, its purchase cost him an additional Lm80 in legal fees. During the year ended 31 October 1999 he spent Lm500 on power to operate the machinery, Lm8,500 on the wages of the machine operator and Lm9,250 on the materials used in production. You are required to distinguish the above items between capital and revenue expenditure. Pg . 27 4. Joe Psaila bought a new computer for his office on 1 May 1999. The computer cost Lm2,500, and he paid an installation charge of Lm100. He also paid Lm900 for software for the computer. He agreed to pay Lm300 for an agreement covering his computer for repairs and maintenance for three years from 1 May 1999. During the year ended 30 April 1999, he paid wages of Lm12,000 to his computer operator, and he estimates that the power used by the computer cost Lm20. You are required to: a. List the items given above as either Capital Expenditure or Revenue Expenditure ; b. Give two reasons for the importance of correctly distinguishing between the two types of expenditure. 5. For the business of R.Debono, a food merchant, classify the following items between capital and revenue expenditure : (a) repairs to meat slicer; (b) new tyre for van; (c) additional shop counter; (d) renewing sign writing on shop; (e) fitting partitions in shop; (f) roof repairs; (g) installing thief detection equipment; (h) wages of shop assistant; (i) new cash register; (j) repairs to office safe; (k) installing new freezers. 6. Distinguish the following items between capital and revenue expenditure: (a) interest on loan to purchase computer; (b) cost of software; (c) cost of paper; (d) wages of computer operator; (e) cost of adding extra memory to the computer; (f) cost of floppy discs used during the year; (g) cost of adding air conditioning to the computer room. Pg . 28.
Load more

Recommended publications
  • Assets Versus Liabilities and Capital Versus Revenue
    Assets versus liabilities and capital versus revenue In this module we are going to look at two separate accounting ideas. The first is the distinction between assets and liabilities. We must be able to understand these accounting terms and be able to identify examples of each. The second is the distinction between capital and revenue income and expenditure. Assets and liabilities Simple definitions of these terms are as follows: assets are items owned by the business and money owed to the business liabilities are amounts owed by the business to other organisations or people Assets and liabilities can be thought of as the opposite of each other. The accounting equation that states that: assets - liabilities = capital confirms this idea, by deducting liabilities from assets to arrive at the value of the business. There is more information on the accounting equation and how it is used in the study module Accounting equation and basic posting. Examples of assets are: Buildings Equipment Inventory (items to be used in manufacture or to be sold) Trade receivables (amounts owed to the business by credit customers) Money in the bank Money held in cash Examples of liabilities are: Trade payables (amounts owed by the business to credit suppliers) Loans (either from a bank or another organisation) Bank overdraft Have a look at the following list and decide which items are assets and which are liabilities, before clicking the icon to see the answer. Item Asset Liability A loan to the business from Simply Loans Ltd A van bought by the business Money in the business petty cash box An amount owed by the business to Super Supplies Ltd for goods purchased on credit Components bought by the business ready to make into items to sell An amount owed to the business by Fox and Sons, who bought some goods on credit Click to display/hide the solution.
    [Show full text]
  • Capital Expenditures in an Office Lease
    As appeared in… www.crej.com Capital Expenditures in AUGUSTan 7, 2013 – AUGUST 20, 2013 Office Lease: Who's on the Hook? he overwhelming majority costs of complying with these the risk of an underperforming T of offices leases allow the laws can be incredibly high, and capital improvement. Finally, landlord to recover, in because these costs are difficult it is important to note that this addition to its base rent, all or a (or impossible) to foresee, they exception should apply only to portion of the landlord's expenses cannot be factored into the base capital improvements that reduce of owning and operating an office rent. Therefore, landlords insist operating expenses by increasing building. The lease provisions that on recouping these costs. A tenant efficiency. It should not operate govern these "pass-throughs" of may argue, quite convincingly, as a back door for landlords to operating expenses from landlords that there is no logical reason for pass through capital repairs and/ to tenants have the dubious these costs to be passed through distinction of being the most and these are merely part of the or replacements. For example, negotiated (and over-negotiated) landlord’s cost of doing business. replacing an outdated, leaky provisions of the lease. But the simple fact is that these roof will surely reduce operating Office landlords typically prepare costs are almost always passed expenses (by eliminating ongoing the initial lease draft. Because the through. For the tenant, it's not a repairs) but that is not something specifics of operating expense pass- battle worth fighting.
    [Show full text]
  • Author Guidelines for 8
    View metadata, citation and similar papers at core.ac.uk brought to you by CORE provided by UUM Repository Classification of Capital Expenditures and Revenue Expenditures: An Analysis of Correlation and Neural Networks Fadzilah Siraja, Nurazzah Abu Bakarb, Adnan Abolgasimc a,b,cCollege of Arts and Sciences Universiti Utara Malaysia, UUM 06010, Sintok, Kedah, Malaysia Tel: 04-9284672, Fax: 04-9284753 E-mail: [email protected], b [email protected] , c [email protected] , ABSTRACT occur are the expenditure will not be labelled as the income statement or the balance sheet, overstating the The classification between the capital expenditures and profit figure in the income statement or overstating the revenue expenditures is one of the common problems in value of the assets in the balance sheet. On the other the accounting literature since it has a significant impact hand, if capital expenditure is treated as a revenue on financial statements. This study aims to analyze the expenditure, the expenditure will not be labeled as the correlation of classification model such as Neural balance sheet or the income statement, understating the Networks (NN) in order to develop a model that can be profit figure in the income statement or understating the trained to recognize hidden patterns of the borderline value of the assets in the balance sheet. between the two expenditures types, viz: the capital and revenue expenditure. Twelve criterions were identified in In summary, the missdistinction between a capital and a order to classify between the two expenditures types and a revenue expenditure will result in financial statements do Backpropagation Learning was utilized in this study.
    [Show full text]
  • Economic Fundamentals, Capital Expenditures and Asset Dispositions
    Economic Fundamentals, Capital Expenditures and Asset Dispositions Brent W. Ambrose ∗ Eva Steinery November 27, 2017 Abstract Research on the disposition effect in real assets to date ignores the active management component of these investments. Active management notably includes decisions about follow-up investment in the form of capital expenditures, as well as dispositions. Using a real option framework, we develop testable hypotheses and provide empirical evidence for the relationships between economic fundamentals, capital expenditures, property values, and the subsequent likelihood of sale. Our results shed new light on the evidence for the disposition effect in real estate. ∗Smeal College of Business, Pennsylvania State University, 381 Business Building, University Park, PA 16802 (e-mail: [email protected]). yCorresponding author: School of Hotel Administration, Cornell SC Johnson College of Business, 465B Statler Hall, Ithaca, NY 14853 (email: [email protected]). We are thankful for comments from Robert Connolly, Davi Geltner, David Ling, Crocker Liu, Tim Riddiough, Jacob Sagi, Stijn Van Nieuwerburgh, and Susan Wachter, as well as seminar participants at the RERI Research Conference 2017 and the AREUEA National Meeting 2017. We gratefully acknowledge financial support from the Real Estate Research Institute (RERI). We are also grateful to the National Council of Real Estate Investment Fiduciaries for providing the data used in this study. 1 The disposition effect denotes a behavioral bias leading investors to hold poorly performing investments to avoid realizing losses.1 It was first documented in financial assets such as stocks and mutual funds (Coval and Shumway, 2005; Dhar and Zhu, 2006; Frazzini, 2006; Ivković, Poterba, and Weisbenner, 2005; Odean, 1998).
    [Show full text]
  • Non-Cash Investing and Financing Activities and Free Cash Flow
    Georgia Tech Financial Analysis Lab 800 West Peachtree Street NW Atlanta, GA 30332-0520 404-894-4395 http://www.mgt.gatech.edu/finlab Dr. Charles W. Mulford, Director Mario Martins Invesco Chair and Professor of Accounting Graduate Research Assistant [email protected] [email protected] Non-cash Investing and Financing Activities and Free Cash Flow Executive Summary Items of property, plant and equipment are often acquired through non-cash investing and financing activities. In these transactions, equipment-purchase financing is provided at the time of purchase. While such transactions increase a company’s productive capacity, they are not reported as capital expenditures in the statement of cash flows. Accordingly, free cash flow calculated based on capital expenditures reported in the statement of cash flows will often be overstated when assets are acquired through such non-cash transactions. In this report we look at a series of non-cash investing and financing transactions and assess their effects on calculated free cash flow. December, 2004 Georgia Tech Financial Analysis Lab www.mgt.gatech.edu/finlab Georgia Tech Financial Analysis Lab College of Management Georgia Institute of Technology Atlanta, GA 30332-0520 Georgia Tech Financial Analysis Lab The Georgia Tech Financial Analysis Lab conducts unbiased stock market research. Unbiased information is vital to effective investment decision-making. Accordingly, we think that independent research organizations, such as our own, have an important role to play in providing information to market participants. Because our Lab is housed within a university, all of our research reports have an educational quality, as they are designed to impart knowledge and understanding to those who read them.
    [Show full text]
  • Understanding University & College Finances
    Understanding University & College Finances Andrew McGettigan @amcgettigan https://andrewmcgettigan.org 8 July 2020, UCU weBinar Overview • Accounting Basics: surpluses & reserves & CASH! • Liquidity & Solvency • How are the in-year finances affected by the pandemic? – How big is the hit? Will it lead to losses? • Could the hit be absorbed without staffing cuts? – Can we pause planned capital expenditure? – Can we utilise cash reserves? – Or could new funds be raised? • Constraining factor: Covenants with lenders Annual Income 2018/19, UK HEIs £2,500,000 £2,000,000 Thousands £1,500,000 £1,000,000 £500,000 £0 Source: Hesa Median income is £140million; Mean is c. £230m. Surpluses, Reserves, Assets & Liabilities FINANCE & ACCOUNTING BASICS Financial Statements • The Annual report includes 3 main financial statements: – Annual Income & Expenditure • money earned and spent • Is the business sustainable? Does it earn more than it spends? – Balance Sheet • What does the university own, what is it owed, what does it owe? – Annual Cash Flow • How has the cash position changed? • Some activities, e.g. borrowing, bring cash in that is not earned (not income) • Some income & expenditure, e.g. depreciation, does not involve cash • Cash is how most demands are settled • Notes to the statements explain matters in more detail and are where important information is found Universities aim to make surpluses • Almost all universities are independent charities: – No owners, so not profit-making – Must reinvest surpluses • Surpluses are made when income exceeds
    [Show full text]
  • Internal Audit Report: Capital Programme Slippage
    Item: 6.1 Monitoring and Audit Committee: 14 November 2019. Internal Audit Report: Capital Programme Slippage. Report by Chief Internal Auditor. 1. Purpose of Report To present the internal audit report on processes and controls relating to the avoidance of Capital Programme Slippage. 2. Recommendations The Committee is invited to note: 2.1. That Internal Audit has undertaken an audit of the processes and procedures relating to the avoidance of Capital Programme Slippage. 2.2. The findings contained in the internal audit report, attached as Appendix 1 to this report, relating to Capital Programme Slippage. It is recommended: 2.3. That the Committee review the audit findings to obtain assurance that action has been taken or agreed where necessary. 3. Background Audit Scotland’s report entitled Best Value Assurance Report: Orkney Islands Council, dated December 2017, found that the Council’s capital programme had been ambitious and not deliverable due to weaknesses in forward planning arrangements. This has resulted in the Council having a history of slippage. The objective of this audit is to review capital projects that have been subject to slippage, in order to identify the respective causes and constraints. 4. Audit Findings 4.1. The audit provides adequate assurance that the processes and procedures relating to Capital Programme Slippage are well controlled and managed. Page 1. 4.2. The internal audit report, attached as Appendix 1 to this report, includes five medium priority recommendations within the action plan. There are no high-level recommendations made as a result of this audit. 4.3. The Committee is invited to review the audit findings to obtain assurance that action has been taken or agreed where necessary.
    [Show full text]
  • S-OX Fixed Assets Risks and Controls 12/15/2005 Page 1 of 10
    Unit: Subject: Sarbanes-Oxley Act Review - Fixed Assets Cycle Title: Risk and Control Identification Year end: E E Y C V R I N O T K E SUGGESTED CONTROLS TO MITIGATE THE POTENTIAL MANAGEMENT CONTROL or COMMENTS (if Risk is CONTROL OWNER G C S R OBJECTIVE I POTENTIAL RISK E E E R RISK (Internal Audit) excluded from the Scope) (Name) J T F B A E O C R Acquisition of Fixed Assets Recorded fixed asset acquisitions represent fixed assets O,F FAS Recorded fixed asset acquisitions do not represent fixed Written capitalisation-expense policies: Guidelines for acquired by the organisation (validity). Fixed assets represent 101 assets acquired by the organisation. Expense items may be capitalising versus expensing acquisitions should be assets to which the entity has legal rights. Only valid items incorrectly capitalised. established. Periodic review by management of assets are capitalised. captured to assets recorded on the fixed assets register. Physical asset verification to asset register. Authorisation of Capex forms in terms of the Limits of Authority including a review of the cost centre, cost element, Capex number, asset value and description of the item. All fixed asset acquisitions are recorded. (completeness) O,F FAS Not all fixed asset acquisitions are recorded. Periodic independent inspection of fixed assets are 102 conducted. The results are agreed to fixed asset records and differences timeously investigated, explained and resolved. Acquisitions of fixed assets are not incorrectly expensed. O,F FAS Acquisitions may be incorrectly expensed. The Adequate policies are in place to ensure the clear distinction 103 understatement of purchases of capital goods will lead to the between items to be capitalised as fixed assets and items understatement of liabilities and assets.
    [Show full text]
  • 06-04 Capital Expenditures
    WISCONSIN ACCOUNTING MANUAL Department of Administration – State Controller’s Office Section 06 EXPENDITURES AND TRAVEL Effective Date 7/1/2015 Sub-section 04 Capital Expenditures Revision Date 3/31/2015 SAM Ref 5-12 BACKGROUND DEFINITION: Capital Expenditures - Long-lived tangible assets obtained or controlled as a result of past transactions, events or circumstances. BUDGETARY VS GAAP This policy statement relates to the recording of capitalized expenditures in the State’s accounting system, for budgetary purposes only. A separate policy statement will address capitalizing expenditures in accordance with Generally Accepted Accounting Principles or GAAP. It is important to note the differences, as well as the similarities, between the budgetary treatment of capitalized expenditures and the GAAP treatment. In budgetary accounting, nearly all disbursements, capitalized or not, are charged as expenditures against the appropriations (or budget). In contrast, the GAAP capitalization policy for proprietary fund types requires that an agency report capital items as assets and depreciate them over their useful lives. For example, a proprietary funds type must report the purchase of a capital item as an expenditure against the appropriation in the year the cash is paid. However, on a GAAP basis, the same item is capitalized in the year of purchase and only the amount of depreciation for the year is reported as an expense. What this means is that, for capitalized items in proprietary funds, the budgetary basis and GAAP basis of accounting will always differ. POLICIES 1. GENERAL POLICY-Budgetary Basis a. Equipment should be recorded as capital expenditures when the following criteria are met: • The asset is tangible in nature, complete in itself, and is not a component of another item.
    [Show full text]
  • A Roadmap to the Preparation of the Statement of Cash Flows
    A Roadmap to the Preparation of the Statement of Cash Flows May 2020 The FASB Accounting Standards Codification® material is copyrighted by the Financial Accounting Foundation, 401 Merritt 7, PO Box 5116, Norwalk, CT 06856-5116, and is reproduced with permission. This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this publication. The services described herein are illustrative in nature and are intended to demonstrate our experience and capabilities in these areas; however, due to independence restrictions that may apply to audit clients (including affiliates) of Deloitte & Touche LLP, we may be unable to provide certain services based on individual facts and circumstances. As used in this document, “Deloitte” means Deloitte & Touche LLP, Deloitte Consulting LLP, Deloitte Tax LLP, and Deloitte Financial Advisory Services LLP, which are separate subsidiaries of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of our legal structure. Copyright © 2020 Deloitte Development LLC. All rights reserved. Publications in Deloitte’s Roadmap Series Business Combinations Business Combinations — SEC Reporting Considerations Carve-Out Transactions Comparing IFRS Standards and U.S.
    [Show full text]
  • Unit 13 Capital and Revenue
    UNIT 13 CAPITAL AND REVENUE Structure 13.0 Objectives 13.1 Introduction 13.2 Need for Distinction between Capital and Revenue 13.3 Capital and Revenue Expenditures 13.3.1 Capital Expenditure 13.3.2 Revenue Expenditure 13.3.3 Deferred Revenue Expenditure 13.4 Capital and Revenue Receipts 13.4.1 Capital Receipts 13.4.2 Revenue Rece~pts 13.5 Capital and Revenue Profits 13.6 Capital arid Revenue Losses 13.7 Some Peculiar Items 13.8 Let Us Sum Up 13.9 Key Words 13.10 Some Useful Books 13.1 1 Answers to Check Your Progress 13.12 Terminal Questions/Exercises 13.0 OBJECTIVES After studying this unit you should be able to: explain the importance of distinction between capital and revenue distinguish between capital and revenue expenditure describe the circumstances under which a revenue expenditure is to be capitalised distinguish between capital receipt and revenue receipt, capital profit and capital loss identify correctly whether an item h of a capital or revenue nature 13.1 INTRODUCTION In the preceding unit you learnt about the basic concepts followed in determining profit or loss and the financial position of a business. In this connection, it is equally necessary to understand the distinction between capital and revenue. Without such clarity you cannot ascertain the correct amount of profit or loss made during an accounting period. In this unit you will learn about the need for such distinction and study how ro decide whether a particular expenditure or a receipt is of capital nature or of revenue nature. 13.2 NEED FOR DISTINCTION BETWEEN CAPITAL AND REVENUE You know that the purpose of maintaining a detailed and systematic record of business transactions is two-fold i.e., i) to ascertain the net result of the trading activity for an accounting year, and ii) to ascertain the financial position of the business as at the end of the accounting year.
    [Show full text]
  • VIII. Accounting for Fixed Assets and Capital Projects__ A. Overview
    VIII. Accounting for Fixed Assets and Capital Projects__ A. Overview: Property Accounting, a unit within the Controller’s Office, is responsible for ensuring that the University’s property standards are adhered to and for maintaining RIT’s asset recordkeeping system which includes capital equipment, land, buildings, and building and site improvements. Objectives: In this chapter you will learn about: • what capital equipment is • purchasing and recording capital equipment purchased on a purchase order, Digital Den, and gifts-in-kind • special requirements regarding equipment purchased with federal funds • how capital equipment purchases are funded • recording changes and retirements of equipment inventory • what information is retained in the Oracle Asset recordkeeping system • physical inventory procedures • procedures for handling surplus equipment • Oracle Assets’ inquiry and reporting features • what capital construction/improvement projects are • how expenses on capital projects are tracked and funded B. Property Standards 1. The federal Office of Management and Budget (OMB) provides property standards for institutions of higher education that receive federal funding. 2 CFR 200.313 states that: a. The Property Accounting system must ensure adequate safeguards to prevent loss, damage or theft of equipment. b. All capital equipment must be insured. c. Physical inventories must be conducted periodically, minimally at least every two years. 2. RIT Property Accounting develops and administers specific policies and procedures regarding acquisition and disposal of capital equipment. Introduction to Accounting at Rochester Institute of Technology: RIT Accounting Practices, Procedures and Protocol Chapter VIII: Accounting for Fixed Assets and Capital Projects Revised November 2019 1 C. Definition of Capital Equipment 1. Capital equipment (including furniture and furnishings) is defined as tangible personal property (moveable) with a cost per unit of at least $5000, including acquisition costs of delivery and installation, and a useful life of more than one year.
    [Show full text]