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Capital and revenue expenditure
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Spending is either on long-term assets or on day-to-day running costs. Getting this right is vital for accurate profit.
Capital expenditure
Capital expenditure is spending on buying, adding to or improving non-current assets, which will be used in the business for more than one year.
It includes costs to get the asset ready for use, such as delivery and installation, and legal fees on buying property.
It is shown in the statement of financial position.
It includes costs to get the asset ready for use, such as delivery and installation, and legal fees on buying property.
It is shown in the statement of financial position.
Revenue expenditure
Revenue expenditure is spending on the day-to-day running of the business, or on maintaining non-current assets.
Examples: wages, rent, fuel, repairs, insurance, goods for resale.
It is an expense in the income statement.
Examples: wages, rent, fuel, repairs, insurance, goods for resale.
It is an expense in the income statement.
Why it matters
If capital expenditure is treated as revenue expenditure, expenses are overstated, so profit is understated, and non-current assets are understated.
If revenue expenditure is treated as capital, profit and assets are overstated.
If revenue expenditure is treated as capital, profit and assets are overstated.
A business buys a machine for £8000, pays £300 delivery and £200 installation, and later £150 for a repair. What is the capital expenditure?
- Machine, delivery and installation get it ready for use.
- 8000 + 300 + 200 = 8500
- The repair is revenue expenditure.
Answer: £8500
Capital expenditure buys or improves non-current assets (including delivery and installation) and goes in the statement of financial position. Revenue expenditure covers running costs and repairs and goes in the income statement. Mixing them up misstates profit and assets.
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