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Chapter 3

Capital Expenditure and Revenue Expenditure

When preparing final accounts it is important to distinguish between capital


and revenue expenditure.
Capital expenditure can be defined as expenditure incurred on the
purchase, alteration or improvement of fixed assets. For example, the
purchase of a car to be use to deliver goods is capital expenditure. Included in
capital expenditure are such costs as:
 Delivery of fixed assets;
 Installation of fixed assets;
 Improvement (but not repair) of fixed assets;
 Legal costs of buying property;
 Demolition costs;
 Architects fees;
Revenue expenditure is expenditure incurred in the running / management
of the business. For example, the cost of petrol or diesel for cars is revenue
expenditure. Other revenue expenditure:
 Maintenance of Fixed Assets;
 Administration of the business;
 Selling and distribution expenses.
Capital Expenditure is shown on the Balance Sheet, while Revenue
Expenditure is an expense in the Profit and Loss account. It is important to
classify these types of expenditure correctly in the accounting system. For
example: if the cost of the car was shown as an expense in the Profit and Loss
account, then the net profit would be reduced, meanwhile, the Balance Sheet
would not show the car as a Fixed Asset. Therefore, incorrect treatment of
expenditure will result:
1 Capital Expenditure treated as
Revenue Expenditure
2 Revenue Expenditure treated as
Capital Expenditure

Increase Expenses
Decrease Net Profit
Decrease Expenses
Increase Net Profit

Decrease in Fixed Assets


in the Balance Sheet
Increase in Fixed Assets
in the Balance Sheet.

Only by allocating capital expenditure and revenue expenditure correctly


between the Profit and Loss account and the Balance Sheet can the Final
Accounts reflect accurately the financial statement of the business. The chart
below shows the main items of capital expenditure and revenue expenditure
associated with three major fixed assets buildings, vehicles and computers.

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Capital Expenditure

Revenue Expenditure

Buildings

cost of building
cost of extension
carriage on raw materials used
the new building
legal fees
labour cost of own employees
to build new premises
installation of utilities in the new
premises e.g. water and electricity.

general maintenance
repairs
redecoration

Vehicles

net cost, including any optional extras


delivery costs
number plates
licence for the new vehicle
any changes to the vehicle that
increases its value.
net cost
installation and testing
modifications, including memory
upgrades,
installation of special wiring
cost of air conditioning
staff training
computer programmes (if the cost
of such programmes is high)

fuel
road licence
painting company logo
insurance
servicing and repairs

Computers

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discs
printing paper
insurance
low cost computer programmes

Exercises
1a.

Explain briefly the distinction between Capital and Revenue


Expenditure.

1b.

State whether the following transactions of a Sports Club should be


classified as Capital Expenditure or Revenue Expenditure:
i.
ii.
iii.
iv.
v.

2.

The redecoration of the club premises.


The installation of a new wine bar.
The building of an extension to the club dressing rooms.
The purchase of wine and spirits.
The purchase of a record player for use in the club lounge.

Mario Abela decided to modernise his premises so that more


customers would be attached and so that the work could be carried out
more efficiently.
During the year ended 30 April 1999, the following took place:
(a) An extension to the office was built, Lm15,600 was paid for materials,
and Lm22,340 for labour. Lm125 was paid for legal fees for permission
to extend building.
(b) The original premises were redecorated Lm2,600.
(c) A new, powerful computer was purchased to process the offices
accounts and other administration. The computer cost Lm5,300.
(d) 50 new smaller computers were purchased at a total cost of Lm97,600
and sold to customers.
(e) The original premises had some old electrical wiring renewed at a cost
of Lm1670, and some additional power points installed at a cost of
Lm760, so that more computers could be demonstrated to customers.
(f) Other running expenses for the year totalled Lm67,400.
You are required to classify the above transactions under Capital
expenditure and Revenue Expenditure.

3.

Lorry Ellul buys new machinery on 1 November 1999 for Lm10,000.


He pays for this by taking out a bank loan, for which he is charged
Lm1,200 interest during the year ended 31 October 1999. The
installation of the machinery cost him Lm450 for labour and Lm75 for
materials. As the machinery is specialised, its purchase cost him an
additional Lm80 in legal fees. During the year ended 31 October 1999
he spent Lm500 on power to operate the machinery, Lm8,500 on the
wages of the machine operator and Lm9,250 on the materials used in
production.
You are required to distinguish the above items between capital and revenue
expenditure.

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4.

Joe Psaila bought a new computer for his office on 1 May 1999. The
computer cost Lm2,500, and he paid an installation charge of Lm100.
He also paid Lm900 for software for the computer. He agreed to pay
Lm300 for an agreement covering his computer for repairs and
maintenance for three years from 1 May 1999.
During the year ended 30 April 1999, he paid wages of Lm12,000 to his
computer operator, and he estimates that the power used by the
computer cost Lm20.
You are required to:
a.
List the items given above as either Capital Expenditure or
Revenue Expenditure;
b.
Give two reasons for the importance of correctly distinguishing
between the two types of expenditure.

5.

For the business of R.Debono, a food merchant, classify the following


items between capital and revenue expenditure:
(a) repairs to meat slicer;
(b) new tyre for van;
(c) additional shop counter;
(d) renewing sign writing on shop;
(e) fitting partitions in shop;
(f) roof repairs;
(g) installing thief detection equipment;
(h) wages of shop assistant;
(i) new cash register;
(j) repairs to office safe;
(k) installing new freezers.

6.

Distinguish the following items between capital and revenue


expenditure:
(a) interest on loan to purchase computer;
(b) cost of software;
(c) cost of paper;
(d) wages of computer operator;
(e) cost of adding extra memory to the computer;
(f) cost of floppy discs used during the year;
(g) cost of adding air conditioning to the computer room.

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