Back to: FINANCIAL ACCOUNTING SS2
Welcome to class!
In today’s class, we will be talking about capital and revenue expenditure. Enjoy the class!
Capital and Revenue Expenditure
Capital Expenditure:
Capital expenditure is a 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 consists of the cost of fixed assets and other associated costs.
E.g.:
- Cost of purchase
- Cost of delivery
- Installation cost
- Legal costs of purchase
- Architect fees.
- Cost of demolition before the new building is sited
- Cost of inspection and test of a 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.
E.g.:
- Cost of maintenance of fixed assets
- Cost of repairs
- Payment of rents and rates
- Payment of wages and salaries
- Cost of transportation etc.
The distinction between Capital and Revenue Expenditure
CAPITAL EXPENDITURE REVENUE EXPENDITURE
| Capital expenditure consists of the cost of fixed assets and other associated costs. | Revenue expenditure consists of the cost of maintenance or repairs of fixed assets |
| Capital expenditure is incurred in long term projects | Revenue expenditure is incurred daily weekly, monthly and yearly and is better described as Recurrent |
| Capital expenditure is expenses that result in increases in the value of fixed assets in the balance sheet | Revenue expenditure are expenses chargeable to the profit and loss accounts |
| Capital expenditure is made on capital items which are long term and have an enduring influence on the profit of the organization | Revenue expenditure is made on revenue items which are short 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
- Overstatements of profit because revenue expenditure must have been understood.
- Overstatement of the value of a fixed asset
Revenue expenditure understated has the following effects
- Understatement of profit
- Understatement of the value of fixed assets
STATEMENTS OF CAPITAL AND REVENUE EXPENDITURE
These are prepared to show the distinction between them mostly in the government office.
ILLUSTRATION
The Federal Ministry of Health incurred in 1989 the following:
N
Construction of hospital ward 28, 500, 000
Purchase of beds 920, 000
Repairs of ambulances 25, 000
Salaries and wages 31, 000, 000
Maintenance of vehicles 7, 500, 000
Purchases of petrol and lubricants 800, 000
Purchase of theatre equipment 7, 920, 000
Construction of boreholes 1, 200, 000
Purchases of drugs 10, 550, 000
Purchases of vaccines 1, 330, 000
Maintenance of mortuary buildings 670, 000
Purchase of incubators 3, 800, 000
Purchase of X-ray machines 4, 200, 000
Prepare statements of
- Capital expenditure
- Revenue expenditure
Solution
Statement of Capital Expenditure
Particulars N
Construction of hospital ward 28, 500, 000
Purchase of beds 920, 000
Purchase of theatre equipment 7, 920, 000
Construction of boreholes 1, 200, 000
Purchase of incubators 3, 800, 000
Purchase of X-ray machines 4, 200, 000
Total 46, 540, 000
Statement of Revenue Expenditure
Particulars N
Repairs pf ambulances 25, 000
Salaries and wages 31, 000, 000
Maintenance of vehicles 7, 500, 000
Purchases of petrol and lubricants 800, 000
Purchases of drugs 10, 550, 000
Purchases of vaccines 1, 330, 000
Maintenance of mortuary buildings 670, 000
Total 51, 875, 000
GENERAL EVALUATION
- State five reasons why organizations separate their operations into different departments
- List six errors that will not affect the agreement of the trial balance
- Explain four classifications of the cost found in the preparation of manufacturing accounts
- Explain the following (a) prime cost (b) work – in – progress (c) manufacturing profit
- List five prime books of the account used in recording financial transactions
In our next class, we will be talking about the Disposal of Fixed Assets. We hope you enjoyed the class.
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