Understand the terms:-Capital Expenditure,Revenue Expenditure,Capital Receipts And Revenue Receipts

Candidates in the LCC Bookkeeping, GCE O Level And AS Level are frequently being asked to differentiate and understand the importance of such terms:-Capital Expenditure, Revenue Expenditure, Capital Receipts And Revenue Receipts.

Capital Expenditure is the acquisition of a fixed asset or adding value to it. All expenses incurred like carriage, import duty, testing,installation and legal charges to put the asset in a working condition is also classified as capital expenditure.

Whereas:

Revenue Expenditure is the day-to-day expenses that are paid by the firm for example rent, lighting, insurance,etc


Illustration:

Company A obtained a loan to purchase a fixed asset of $100,000. Every month, the company is required to pay to the bank monthly interest of $1,000. In this case, explain what is capital and revenue expenditure

As the loan is used for buying the fixed asset for company's expansion it is a capital expenditure. However, as the loan interest is paid monthly it becomes a part of day-to-day expense hence it is a revenue expenditure.

Next what is so important to differentiate Capital and Revenue Expenditure?

Capital expenditure is not charged to Income Statement but revenue expenditure is charged into the Income Statement which will affect the bottom-line namely the profits of the company.

Incidentally, there are many accounting fraud/scandal where these concept of capital versus revenue expenditure has been greatly abused. The crooks would cook up the accounting profit of the company but classifying revenue expenditure as capital expenditure namely the expenses do not go into the Income Statement and are taken up into the Balance Sheet item as capital expenditure

In brief, the accounting treatment of capital expenditure and revenue expenditure are different:-

Revenue expenditure must be charged out to the Income Statement using the accrual and or matching concept

whereas

Capital expenditure goes into the Balance Sheet Item therefore not affecting the profits of an entity.


Similarly, Capital Receipts relates to in-flows or proceeds from the disposal of capital items like fixed assets(plant and machinery, land, building,etc,)

whereas

Revenue Receipts received by an entity are proceeds or inflows received in the course of the year like sales, commission received, discount received and others


In this case, both receipts whether they are capital or revenue, they are still taken up into the Cash Book of the company.