PRINCIPLES OF ACOUNTING - ‘O’ LEVEL NOTES

CAPITAL EXPENDITURE AND REVENUE EXPENDITURE

Capital expenditure is expenditure incurred to acquire non-current assets or adding value to existing
non –current assets.

Any other costs incurred to bring an asset into use are also classified as capital expenditure.

Included in such amounts should be spending on

acquiring fixed assets

bringing them into the business
legal costs of buying buildings
carriage inwards on machinery bought
any other cost needed to get a fixed asset ready for use

Revenue expenditure refers to expenses needed for the day-to-day running of the business.

Included under revenue expenditure for example are petrol costs for van, repairs to van, and
electricity costs of using machinery.

Exercise: Classify the following into capital and revenue expenditure.

1. New radio car

2. Fuel for motor vehicle

3. Computer repair costs

4. New air cooler system

5. Legal costs incurred on new asset

6. Carriage inwards on non current asset

7. Repainting of premises

If capital expenditure is incorrectly treated as revenue expenditure, net profit is reduced and the
value of non-current assets is understated.

If revenue expenditure is incorrectly treated as capital expenditure, net profit is increased and the
value of non-current assets is overstated.

It is important to note that expenditure can have a component of capital expenditure and revenue
expenditure. Such scenarios are referred to as joint expenditures. For example, wages of $20 000
might be ¾ revenue expenditure and ¼ capital expenditure. Therefore those wages need to be
treated accordingly.

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