Capital And Revenue Income And Expenditure (Copy)
1.3 Accounting for Non-Current Assets – Cheat Sheet
Key Concepts
- Capital Income:
- Definition: Income from the sale or disposal of non-current assets or long-term capital injections.
- Examples:
- Sale of machinery, buildings, or land.
- Capital raised from shareholders or loans.
- Effect on Accounts: Recorded in the balance sheet; does not affect profit/loss unless there’s a gain/loss on disposal.
- Capital Expenditure:
- Definition: Money spent to acquire or improve long-term assets that will benefit the business over several years.
- Examples:
- Purchase of machinery, property, or vehicles.
- Improvements to existing assets.
- Effect on Accounts: Recorded as assets on the balance sheet; depreciated over time.
- Revenue Income:
- Definition: Income generated from the normal course of business operations.
- Examples:
- Sales revenue from goods or services.
- Interest or rent income.
- Effect on Accounts: Recorded in the income statement; contributes to profit.
- Revenue Expenditure:
- Definition: Day-to-day operating expenses that are used up in the short term.
- Examples:
- Wages, rent, utilities, repairs, and maintenance.
- Effect on Accounts: Recorded in the income statement; reduces profit for the period.
Difference between Capital and Revenue Expenditure
| Feature | Capital Expenditure | Revenue Expenditure |
|---|---|---|
| Purpose | To acquire or improve long-term assets. | To maintain daily business operations. |
| Effect on Profit/Loss | Not immediately expensed, affects profit over time (via depreciation). | Immediately expensed, reduces profit for the period. |
| Impact on Balance Sheet | Recorded as an asset. | Does not appear on the balance sheet. |
| Depreciation | Depreciated over time (except land). | No depreciation; fully expensed in the period. |
| Examples | Purchase of land, machinery, or vehicles. | Salaries, rent, utility bills, routine repairs. |
Effect of Incorrect Treatment
- Capital Expenditure Misclassified as Revenue:
- Effect:
- Overstated profits (as the expense is recorded immediately).
- Understated assets (no capitalized asset recorded).
- Incorrect depreciation in future periods.
- Effect:
- Revenue Expenditure Misclassified as Capital:
- Effect:
- Understated profits (expense not recognized in the current period).
- Overstated assets (expense capitalized incorrectly).
- Overstated depreciation in future periods.
- Effect:
Key Formulae
- Capital Expenditure = Cost of acquiring or improving non-current assets.
- Revenue Expenditure = Costs incurred to run the business on a day-to-day basis.
Summary
- Capital Income: From long-term asset sales or capital raised.
- Capital Expenditure: Spending on non-current assets (depreciated over time).
- Revenue Income: Regular business income.
- Revenue Expenditure: Day-to-day operating costs, expensed in the period.
Correctly classifying income and expenditure ensures accurate financial reporting, helping businesses make informed decisions and comply with regulations. Misclassification can distort profits, asset values, and financial ratios.