Capital expenditure

-is expenditure on non-current assets with an expected life of more than 12 months.
-is the money spent on acquiring, improving and installing non-current assets.
-It involves:
1. The purchase/acquisition of a non-current asset e.g. land and buildings
2. Cost of delivering or bringing in purchased non-current asset.
3. Installation costs and cost of assembling a non-current asset.
4. Cost of adding value to the non-current asset e.g. extending a building.
5. Legal costs and license fees
6. Architectures fees- costs for the architecture who drew a plan for the building
7. Demolition fees- costs of removing trees before a building is built

Revenue expenditure
-is money spent on running a business on a day-to-day basis and on resources that will
generally be used up within one year e.g. insurance and salaries and wages.
-also involves costs of repairing a non-current asset e.g. redecorating the interior

NB: -Revenue expenditures are recorded in the income statement and they reduce profit for
the year.
-Capital expenditures are recorded in the statement of financial statement and increases non-
current assets.

Capital receipts
-is the money received from the sale of non-current assets such as motor vehicle.
-amounts received which do not form part of the day-to-day trading activities.

Revenue receipts
-are amounts received in the day-to-day trading activities from revenue and other items of
income such as rent received.

NB: -Revenue receipts are recorded in the income statement and they are added to gross
profit.
-Capital receipts are recorded in the statement of financial statement and increase current
assets. Profit on disposal is added to gross profit in the income statement while loss on
disposal is recorded as an expense.

Accounting principles and policies

Business entity
-The owner of a business is regarded as being completely separate from the business.
- it involves recording the capital account , the drawings account and the current account.

Duality
- Every transaction has two entries namely a debit entry and a credit entry.

Money measurement
-Only information which can be expressed in terms of money can be recorded in the
accounting records.
- Several aspects of a business such as staff expertise, the morale of the workforce, the release
of a competitor product etc. will not be shown in the accounting records as their values
cannot be given monetary values.
Matching
-The revenue of a period is matched against the corresponding expenses pertaining to that
period.
-The cost of using the asset should be matched against income/revenue earned by the asset.
-Application-recording of owing/accruals and prepayments in the income statement.
Recording of depreciation of non-current assets as expenses in the income statement.

Consistency
-if a method is chosen it must be followed throughout the coming accounting periods year to
enable valid comparison
- using the same depreciation method each year.

Prudence concept
-non-current assets and profit should not be overstated.
-Application: Recording provision for depreciation and provision for doubtful debts in the
financial statements.

Going concern
-The business is assumed to continue to operate for an unforeseeable future and that there is
no intention to close down the business.
-Application: Non-current assets will be shown at their Net Book Value (cost less
depreciation) and not at their selling prices. Inventory will be valued at a price lower than its
cost / net realizable value.

Materiality
-Items of low value (low cost non-current assets or sundry expenses) are grouped and
recorded as one item.
-Application: Recording loose tools in the financial statement.

Historical cost
-All assets and expenses are recorded in financial statements at their actual cost.
-Application: Recording non-current assets, inventory at costs not their selling prices.

Realisation
-A profit should not be recorded before it is earned, i.e. Profit is only recorded when the legal
title of goods or services passes on from the seller to the buyer who is obliged to pay for
them.

Accounting Policies
• Policies set up by the IAS (International Accounting Standards) regulate how international
accounting records are maintained.
-Relevance- financial information is relevant only if it affects the business decisions, as they
are the base of further decisions that will be taken. Information in financial statements can be
used to alter or reconfirm future expectations, set future goals etc and thus must be relevant
- Reliability- financial information is reliable only if it can be depended upon to represent
actual events and is free from error and bias. Financial statements must be capable of being
independently verifiable and free from any significant errors. Whenever judgments or
estimates are being made, suitable caution must be taken.
-Understandability- financial reports must be capable of being understood by the users of
that report who are assumed to have basic accounting knowledge. No information should be
omitted from the financial statements because it is thought to be too difficult to understand.
-Comparability-a financial report can only be effectively compared with reports for other
periods f the same or similar businesses if similarities and differences can be identified. The
differences in policies must be identified to make valid comparisons