Capital and Revenue Expenditure

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Capital and Revenue Expenditure. Capital expenditure. Buy fixed assets or Add to the value of an existing fixed asset. Revenue expenditure. Day-to-day running of business. Think it over. Buying a van Petrol costs for van Repairs to van Putting extra headlights on van Buying machinery
Capital and Revenue Expenditure

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Slide 1

Capital and Revenue Expenditure

Slide 2

Capital expenditure

  • Buy fixed assets or

  • Add to the value of an existing fixed asset

Slide 3

Revenue expenditure

  • Day-to-day running of business

Slide 4

Think it over

  • Buying a van

  • Petrol costs for van

  • Repairs to van

  • Putting extra headlights on van

  • Buying machinery

  • Electricity costs of using machinery

  • Painting outside of new building

  • Three years later – repainting outside the same building

Slide 5

Think it over

  • A builder was engaged to perform some work on your premises, the total bill being $4,500. If one-third of this was for repair work and two-thirds for improvements, what will be the correct accounting treatment?

Slide 6

Think it over

  • On 1 January 2009, DEP Tour Operator Limited purchased four second-hand tour buses. The list price of the buses was $500,000 each and the supplier gave a $200,000 trade discount because of the bulk purchase. The payment was to be made through four half-yearly equal instalments of $530,000 each. The company spent a further $1,200,000 on each bus for renovations. The freight charges for the delivery of the buses amounted to $108,000. During installation, an accident happened and the company paid a repair cost of $20,000. In order to legalise the use of the buses as tour buses, an inspection fee of $90,000 was paid. An annual licence fee of $80,000 was also paid. You are required to prepare a statement to calculate the cost of the buses. (HKAL 2001)

Slide 7

Incorrect treatment of expenditure

  • Capital expenditure is incorrectly treated as revenue expenditure

  • Revenue expenditure is incorrectly treated as capital expenditure

Slide 8

Capital expenditure is treated as revenue expenditure

  • Value of fixed asset is understated

  • Net profit is understated

Slide 9

Revenue expenditure is treated as capital expenditure

  • Revenue expenditure is treated as capital expenditureValue of fixed asset is overstatedNet profit is overstated

Slide 10

Think it over

XYZ Co purchased a new machine at the list price of

$250,000. The supplier offered a trade discount of 10%.

The supplier also provided that if the company settled

the balance within 10 days, a further 10% cash discount

would be given. XYZ Co promptly settled the debt, taking

the advantage of both discounts. In addition, the company

Incurred installation costs of $4,500. The total

transportation and insurance cost incurred for the shipment

of the machine amounted to $3,000 and $6,000 respectively.

$1,200 was paid to the supplier for the maintenance charge

for the current year.

Explain how each of the above figures should be

accounted for by the company. (HKAL 1998)

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