Types of Expenditures & Reciepts

Expenditures

Money outflows or money spent on something

Reciepts

Money recieved or cash inflows

Capital Expenditures

Money spent on Acquiring improving or installing a non current Assest and has a benefit of more than a year

Any Capital Expenditure must be capitalised which means it must be added to the value of the non current asset

For example, delivery of the new non current asset must be capitalised. Any cost of Acquiring or upgrading it must be considered as a capital expenditure

Revenue Expenditure

Money Spent on costs of day to day runnings of the business on resources that are used up with in a year

Whenever a cost has the prefix "re" such a repainting then this is a cost that is done to maintain the non current asset

Cost such as rent, repainting, repairment cost are revenue expenditures but cost of upgrading the non current asset such as adding a new extension is a capital expenditure

Capital Reciepts

Money recieved not from normal day to day transaction but Capital Transactions

This is when you recieve huge amounts of money not normally from trading activites. Examples are sale of surplus non current asset. Other common examples include introduction of new captial or obtaining a new long term loan

Revenue Reciepts

Money Recieved from day to day tradings of the business

These include commision, rent income etc

Difference between Capital & Revenue Expenditure

1. Firstly, We can talk about the definitions for each

2. Capital Expenditure is recorded in the Balance sheet where as Revenue expenditure is recorded in the income statement

3. Capital Expenditures aids profit and are not for resale and must be depreciated whereas, revenue expenditure is charged fully for that year

4. Capital Expenditure has a benefit of more than a year, where as revenue expenditure has a benefit of less than a year

How can we identify them?

For some questions, it can get confusing...

For example, if the engine of the motor vehicle fails and the business plans to replace it with a newer efficient engine

This seems to contradict with the "re" prefix but the big giveway is the efficient word and so we can consider this as an improvement thus a captial expenditure

Wrong Treatments of Capital & Revenue Expenditures

In some questions, the owner might have accidently recorded revenue expenditure as capital expenditure or vice versa

In each scenario, we need to explain the effect of the error:

1. If Revenue expenditure is overstated, the the expense will be overstated and profit will be understated in the income statement whereas in the balance sheet the non current assets will be understated and the capital will be understated due to profits

2. If Revenue expenditure is understated, the the expense will be understated and profit will be overstated in the income statement whereas in the balance sheet the non current assets will be overstated and the capital will be overstated due to profits

3. Also the accounting records will not show a true and fair view of accounting records and it will be inaccurate