C hapter 21: Capital expenditure and

revenue expenditure
Contents of chapter
This chapter examines the difference between capital and revenue expenditures. Examples are provided. The
effects of incorrect classification of expenditures are also shown.

Notes for teachers

Expenditure can be classified in the following ways:
1
(i) If it adds to the value of a fixed asset, it is called capital expenditure.
(ii) If it does not add to the value of a fixed asset, it is called revenue expenditure.

Some expenditure is part of each kind. It therefore has to be split between capital expenditure and
2
revenue expenditure.

(i) If capital expenditure is incorrectly treated as revenue expenditure:

3
a. If it is added to the cost of goods sold,
Effect: reduces gross profit and reduces net profit.
b. If it is added to expenses,
Effect: reduces net profit only.

(ii) If revenue expenditure is incorrectly treated as capital expenditure:

a. If it is omitted from the cost of goods sold,
Effect: increases gross profit and increases net profit.
b. If it is omitted from expenses,
Effect: increases net profit only.

This chapter ignores the issue of ‘depreciation’, which will be covered in Chapters 22 and 23.
4

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Answers to MCQs and exercises
21.1 B 21.2 C 21.3 D 21.4 B 21.5 C

21.6 Capital expenditure: 1, 3, 4, 6, 9

Revenue expenditure: 2, 5, 7, 8, 10

21.7X Capital expenditure: 3, 5, 7, 10, 12

Revenue expenditure: 1, 2, 4, 6, 8, 9, 11

21.8 Capital expenditure: (1) $1,500, (2) $500, (3) $2,300, (5) $100, (6) $4,000
Revenue expenditure: (1) $6,500, (2) $1,500, (3) $200, (4) 400, (5) $700

21.9
T Tang
Revised Profit for the year ended 31 December 20X8
$ $
Net profit before corrections 28,910
Add (1) Purchases overstated 311
(3) Loan interest overstated 500 811
29,721
Less (2) Motor repairs understated 290
Revised net profit 29,431

21.10X
S Sang
Revised Profit for the year ended 30 June 20X7
$ $
Net profit before corrections 77,270
Add (3) Motor expenses overstated 379
77,649
Less (1) Repairs to fixtures understated 750
(2) Sales overstated 6,000 6,750
Revised net profit 70,899

21.11X
(a) Corrected Gross Profit Figure
$ $
As per accounts 216,290
Add (4) Purchases overstated 790
217,080
Less (2) Carriage inwards understated 77
(5) Purchases understated 2,380 2,457
Corrected figure of gross profit 214,623

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 (b) Corrected Net Profit Figure
$ $
As per accounts 110,160
Add (1) Motor expenses overstated 5,500
(4) Purchases overstated 790 6,290
116,450
Less (2) Carriage inwards understated 77
(3) Rent understated 2,000
(5) Purchases understated 2,380 4,457
Corrected figure of net profit 111,993

(c) Corrected Fixed Assets Figure

$ $
As per accounts 190,000
Add (1) Van 5,500
(4) Machinery 790 6,290
196,290
Less (2) Fixtures 77
(3) Buildings 2,000
(5) Office equipment 2,380 4,457
Corrected figure of fixed assets 191,833

(d) Corrected Current Assets Figure

$
As per accounts* 77,600

* Does not need amendment

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