Slide 24 1 Chapter 24 Capital expenditure and

Slide 24. 1 Chapter 24 Capital expenditure and revenue expenditure Frank Wood and Alan Sangster , Frank Wood’s Business Accounting 1 , 12 th Edition, © Pearson Education Limited 2012

Slide 24. 2 Learning objectives After you have studied this chapter, you should be able to: Ø Distinguish between expenditure that is capital in nature and that which is revenue expenditure Ø Explain why some expenditure is a mixture of capital expenditure and revenue expenditure Frank Wood and Alan Sangster , Frank Wood’s Business Accounting 1 , 12 th Edition, © Pearson Education Limited 2012

Slide 24. 3 Learning objectives (Continued) Ø Explain the effect on the financial statements and the profits shown there, if revenue expenditure is wrongly treated as being capital expenditure, and vice versa Frank Wood and Alan Sangster , Frank Wood’s Business Accounting 1 , 12 th Edition, © Pearson Education Limited 2012

Slide 24. 4 Capital expenditure is incurred when a business spends money either to buy non-current assets or add to the value of an existing non-current asset. Included is: Ø Buying the asset and bringing it into the business Ø Any associated legal costs Ø Carriage inwards Ø Any costs needed to ready the asset for use Frank Wood and Alan Sangster , Frank Wood’s Business Accounting 1 , 12 th Edition, © Pearson Education Limited 2012

Slide 24. 5 Revenue expenditure is expenditure incurred in running the business on a dayto-day basis. Frank Wood and Alan Sangster , Frank Wood’s Business Accounting 1 , 12 th Edition, © Pearson Education Limited 2012

Slide 24. 6 Differences between capital and revenue expenditure Frank Wood and Alan Sangster , Frank Wood’s Business Accounting 1 , 12 th Edition, © Pearson Education Limited 2012

Slide 24. 7 Dealing with joint expenditure Frank Wood and Alan Sangster , Frank Wood’s Business Accounting 1 , 12 th Edition, © Pearson Education Limited 2012

Slide 24. 8 Incorrect treatment of expenditure If expenditure is treated incorrectly and classified wrongly, whether revenue as capital or capital as revenue, then both the income statement and statement of financial position figures will be wrong. Frank Wood and Alan Sangster , Frank Wood’s Business Accounting 1 , 12 th Edition, © Pearson Education Limited 2012

Slide 24. 9 Treatment of loan interest Ø Where money is borrowed to finance the purchase of a non-current asset, interest will be paid on the loan. Ø Loan interest is not a cost of acquiring the asset but is a cost of financing its acquisition. Ø However, new rules introduced in 1993 mean that it is compulsory to capitalise interest incurred in constructing an asset. Frank Wood and Alan Sangster , Frank Wood’s Business Accounting 1 , 12 th Edition, © Pearson Education Limited 2012

Slide 24. 10 Learning outcomes You should have now learnt: 1. How to distinguish between capital expenditure and revenue expenditure 2. That some items are a mixture of capital expenditure and revenue expenditure, and the total outlay need to be apportioned accordingly Frank Wood and Alan Sangster , Frank Wood’s Business Accounting 1 , 12 th Edition, © Pearson Education Limited 2012

Slide 24. 11 Learning outcomes (Continued) That if capital expenditure or revenue expenditure is mistaken one for the other, then gross profit and/or net profit will be incorrectly stated, as will the capital account and non-current assets in the statement of financial position 4. That if capital receipts or revenue receipts are mistaken one for the other, then gross profit and/or net profit will be incorrectly stated, as will the capital account and noncurrent assets in the statement of financial position 3. Frank Wood and Alan Sangster , Frank Wood’s Business Accounting 1 , 12 th Edition, © Pearson Education Limited 2012