Capital and Revenue Expenditure

 

Welcome to class! 

In today’s class, we will be talking about capital and revenue expenditure. Enjoy the class!

Capital and Revenue Expenditure

Capital and Revenue Expenditure | classnotes.ng

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.:

  1. Cost of purchase
  2. Cost of delivery
  3. Installation cost
  4. Legal costs of purchase
  5. Architect fees.
  6. Cost of demolition before the new building is sited
  7. 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.:

  1. Cost of maintenance of fixed assets
  2. Cost of repairs
  3. Payment of rents and rates
  4. Payment of wages and salaries
  5. 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

  1. Overstatements of profit because revenue expenditure must have been understood.
  2. Overstatement of the value of a fixed asset
Revenue expenditure understated has the following effects
  1. Understatement of profit
  2. 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
  1. Capital expenditure
  2. 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
  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 the 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 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.

Should you have any further question, feel free to ask in the comment section below and trust us to respond as soon as possible.

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