UGBS 205

Fundamentals of Accounting Methods

Week 9– Capital Expenditure and Revenue Expenditure

College of Humanities
Business School
2016/2017
 Overview
• This session presents the difference(s) between capital
expenditure and revenue expenditure and make appropriate
entries in the ledgers and financial statement. The difference
between capital and revenue receipts is also highlighted

Bekoe, Asare, Donkor and Appiagyei, UGBS Slide 2

 Learning Objectives
• At the end of the session, you should be able to
– Explain the difference between capital receipts and
revenue receipts
– Explain the difference between capital expenditure and
revenue expenditure
– Determine the relevant financial statements for recording
capital receipts, revenue receipts, capital expenditure and
revenue expenditure

Bekoe, Asare, Donkor and Appiagyei, UGBS Slide 3

 Reading List
• Read Recommended Text –
-Chapter 12 of Marfo-Yiadom, Asante & Tackie (2015)

-Chapters 24, 26 and 27 of Wood & Sangster (2008)

- International Accounting Standards (IAS) 16: Property,

plant and equipment

• Other Financial Accounting text books available to students

Bekoe, Asare, Donkor and Appiagyei, UGBS Slide 4

 Capital Income/Receipts
This refers to proceeds or monies received from;
• The owner of a business as additional investments in
the business

• The sale of non-current assets

• The acquisition of a loan for business operations

Bekoe, Asare, Donkor and Appiagyei, UGBS 5

 Revenue Income/Receipts

This refers to receipt or income that is earned;

• Normally in the course of business operations which

may be from
– the main operations of the organisation, or
– from other sources

– Examples can be sales, rent income and other commissions

received.

Bekoe, Asare, Donkor and Appiagyei, UGBS 6

 Capital Expenditure

• The expenditure is incurred to acquire, manufacture

or improve assets for the purpose of earning income
over time in an organisation.

Bekoe, Asare, Donkor and Appiagyei, UGBS 7

 Features of Capital Expenditure
The expenditure is made
 To acquire assets referred to as non-current assets.

 To construct non-current assets, e.g. wages or salaries of

workers to construct an organisation’s building.

 To put a new non-current assets in a usable position, e.g.

legal charges on the purchase of land and building, cost
on registering and acquiring a number plate for a new
vehicle, transport expense on new machinery bought
and any expense to put the new machinery in usable
position.
Bekoe, Asare, Donkor and Appiagyei, UGBS 8
 Features of Capital Expenditure
To increase the revenue earning capacity of an asset or
business organisation.
 To acquire an asset, that gives benefits over many years
in the business organisation, e.g. goodwill paid for in a
purchased business organisation.
 For an asset, though revenue in nature, yet provide
benefits for many years, e.g. extended or heavy
advertising programme within a year, and preliminary
or business formation expenses.
 To pay off any loan initially acquired for the operations
of the business.
 Most of these assets acquired are referred to as non-
current assets
Bekoe, Asare, Donkor and Appiagyei, UGBS 9
 Revenue Expenditure

This is the expenditure which is incurred

for the purpose of maintaining the non-
current asset and the earning capacity of
the business organisation.

Bekoe, Asare, Donkor and Appiagyei, UGBS 10

 Features of Revenue Expenditure

The expenditure is incurred;

 normally in the course of the business operations

 constantly in the course of business operations

 and consumed totally in the period it is incurred.

 The full benefit of the expenditure is normally

consumed totally in the period in which it is incurred.

Bekoe, Asare, Donkor and Appiagyei, UGBS 11

 Relevant Financial Statements
• Capital income/receipt that is received as additional
investments by the owner of the business is credited to
the capital account.
• Others in the form of income from the sale of non-
current assets can be;
– credited to the income statement where such amount is not
material;
– otherwise such amount is credited to capital surplus or
reserve.

Bekoe, Asare, Donkor and Appiagyei, UGBS 12

 Relevant Financial Statements

• Revenue Income is shown as income in the trading

income statement for the year when they are earned.

• The income which is received but not earned for that

particular year is treated as a current liability in the
statement of financial position.

• On the other hand the income which is earned but

not received is an asset and is shown in the statement
of financial position as a current asset.

Bekoe, Asare, Donkor and Appiagyei, UGBS 13

 Relevant Financial Statements

• Capital Expenditure is shown in the statement of

financial position mainly as non-current asset. As and
when a portion of such expenditure is used, it is
treated as revenue expenditure, specifically
depreciation and written off in the income statement.

Bekoe, Asare, Donkor and Appiagyei, UGBS 14

 Relevant Financial Statements

• Revenue Expenditure is shown in the income statement

as expense consumed in the year.

• Such expenditure acquired or paid for but not consumed

within the year is treated as prepayment or prepaid
expense and shown in the statement of financial position
as current asset.

• On the other hand the expenditure consumed but not

paid for is shown as accrued expense or expense payable
and shown in the statement of financial position as
current liability.
Bekoe, Asare, Donkor and Appiagyei, UGBS
15
 End of Session Questions
• Distinguish between capital receipts and revenue
receipts

• Distinguish between capital expenditure and revenue

expenditure

Bekoe, Asare, Donkor and Appiagyei, UGBS Slide 16