When a business entity spends money (or purchase on credit) to acquire goods or services, a decision need to be made as to the purpose and nature of the expenditure. The questions asked include something along these lines:-
- What did I pay for?
- Is the thing that I paid for have some value or benefits to my business over the long run? (e.g. more than one year)
- Is it something that I paid because of something that the business had already enjoyed or used in the past? (e.g. electricity, phone, water & etc.)
- Is it for something that the business intends to resell later?
- Is it for packing of the goods meant to be sold later?
In accounting, the classification of the expenditure into either capital expenditure or revenue expenditure is required. Wrong classification of the expenditure may have a great impact on the financial position (meaning is the balance sheet of the business entity concerned) and the financial performance/results (meaning is the profit or loss performance of the business entity concerned referring to the income statement) of the business entity.
Do not get yourself confused between the capital expenditure and the capital contribution by business owners. They are two different things.
Capital expenditure refers to the expenditure made by business entities to acquire assets (usually non-current or fixed assets) that are expected to give the business entities future economic benefits (by way of using the assets in the business to generate revenue or income). Capital expenditure is recorded as asset and therefore would appear on the balance sheet of the business entities. Examples of capital expenditure are property acquired and used as office premises, computers, furniture, fixtures and fittings & etc. On the other hand, revenue expenditure refers to those expenses incurred to acquire goods or services that are also essential in terms of the daily operations of the businesses. However, the benefits that revenue expenditure gives to the business entities are of a shorter term in nature and usually in the day to day operations and DO NOT provide future economic benefits, i.e. the benefits are consumed over a short period of time (usually one year is the period that is used as the measurement).
Revenue expenditure is recorded as expenses in the Income Statement. Examples of revenue expenditure are office rentals, utilities such as water & electricity, printing & stationery, repairs and maintenance & etc. revenue expenditure also includes those incurred to maintain the earning capacity of non-current assets such as repairs and maintenance.
clasify the following between ‘capital’ and ‘revenue’ expenditure
1. repairs to meat slicer
2. new tyre for van
3. additional shop counter
4. carriage on return outwards
5. renewing signwriting on shop
6. wages of shop assistant
7. new cash registers
8. installing extra toilet
9. roof repairs
10. installing thief detection equipment
clasify the following between ‘capital’ and ‘revenue’ expenditure
1. repairs to meat slicer. revenue expenditure (expense)
2. new tyre for van. revenue expenditure (expense)
3. additional shop counter. capital expenditure (asset)
4. carriage on return outwards revenue expenditure (expense)
5. renewing signwriting on shop. revenue expenditure (expense)
6. wages of shop assistant. revenue expenditure (expense)
7. new cash registers. capital expenditure (asset)
8. installing extra toilet. capital expenditure (asset)
9. roof repairs. revenue expenditure (expense)
10. installing thief detection equipment. capital expenditure (asset)
On 1st December 2011 the financial position of Nairobi Enterprises was as follows;
Bills payable 18,000.00
Creditors 8,900.00
Capital 34,000.00
Cash 19,500.00
Debtors 11,400.00
Equipment 30,000.00
Nairobi Enterprises had the following transactions during the month;
2nd December 2011 Paid office rent 600.00
4th December 2011 Received a cheque of 3,000.00
from a debtor
6th December 2011 Paid a creditor cash Kshs. 3,500.00
8th December 2011 Purchased Furniture for cash Kshs.
5,000.00
12th December 2011 Paid electricity cash Kshs. 4,000.00
18th December 2011 Made cash sales Kshs. 40,000.00
23rd December 2011 Credit purchases Kshs. 40,000.00
31st December 2011 Credit sales Kshs. 35,000.00
Using the above information enter the above transactions into their respective ledger accounts and balance them off and extract the trial balance as at 30th december 2011.
creditors=8900+40000-3600
bills payable=18000-600-4000
cash=19500+3000+40000-600-3500-4000
debtors=11400+35000-300
furniture=5000
purchases=40000
sales=40000+35000
capital=34000
equipment=30000
trial balance
Dr Cr
creditors 45400
bills payable 13400
cash 49400
debtors 43400
furniture 5000
purchases 40000
sales 75000
capital 34000
equipment 30000
_____ _____
167800 167800
——– ——–
very well and understandable explanations well keep it up
invoice price of this machinery is Rs. 800,000/-.
Rs. 50,000/- as custom duty, freight charges
Rs. 10,000/- was spent as installation and erection cost
Rs. 100,000/- has also been incurred for training the machine staff to operate this machinery
an internal part of the machinery got damaged and a new part was replaced with an amount of Rs. 9,000/-.
You are required to identify along with proper reasons that which of the costs of the above mentioned transactions would be charged to the
machinery account and which be not.
Classify the following between capital and revenue expenditure..
1.Fitting partitions in shop
2.repairs to office safe
A car costs £12,000. It will be kept for three years, and then sold for £3,000. Calculate the
depreciation for each year using (a) the reducing balance method, using a depreciation rate of 35
per cent, (b) the straight line method.
A. Reducing Balance Method
In the reducing balance method, the depreciation for each year is calculated as a fixed percentage of the book value of the asset at the beginning of that year.
Year 1:
– Depreciation = 35% of £12,000 = £12,000 × 0.35 = £4,200
– Remaining value = £12,000 – £4,200 = £7,800
Year 2:
– Depreciation = 35% of £7,800 = £7,800 × 0.35 = £2,730
– Remaining value = £7,800 – £2,730 = £5,070
Year 3:
– Depreciation = 35% of £5,070 = £5,070 × 0.35 = £1,774.50
– Remaining value = £5,070 – £1,774.50 = £3,295.50
Note: The remaining value after 3 years is slightly higher than the selling price (£3,295.50 vs £3,000).
B. Straight-Line Method
In the straight-line method, the same amount of depreciation is charged each year.
1. Initial cost of the car: £12,000
2. Residual value after 3 years: £3,000
3. Total depreciation over 3 years: £12,000 – £3,000 = £9,000
Annual Depreciation: £9,000 / 3 years = £3,000 per year
So, the annual depreciation using the straight-line method is £3,000 each year.