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CHP 14 Capital and Revenue Expenditures

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50 views27 pages

CHP 14 Capital and Revenue Expenditures

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t.zeeshan
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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5 TO BEGIN

1 Give one example of capital and one Classify the following transactions as

2
example of revenue receipt capital expenditure or revenue
expenditure
• Purchased a delivery van for

3
$25,000.
• Paid $500 for routine maintenance
of the delivery van.

4 Current learning: List the impact of capital and revenue

5
What is the difference between capital expenditure on business
expenditure and revenue expenditure
5 TO BEGIN
1
Capital Receipt: Purchased a delivery van for $25,000
Money received from selling a piece of machinery. Classification: Capital Expenditure
Reason: It is a one-time inflow and relates to the Reason: purchase of a non-current asset that
disposal of a non-current asset. operations over a long period.

2
Revenue Receipt: Paid $500 for routine maintenance of the delivery
Income from selling goods or services. van
Reason: It is recurring and arises from the normal Classification: Revenue Expenditure

3
operations of the business. Reason: Maintenance is a recurring expense required
to keep the asset in working condition, and it does not
enhance the asset's value or lifespan significantly.

4 Capital Expenditure Money spent on acquiring, Impact of Capital Expenditure

5
upgrading, or improving long-term assets that provide Creates Long-Term Assets
benefits over multiple accounting periods. Improves Productivity and Capacity
Revenue Expenditure Money spent on the day-to-day
running of a business to maintain operations and Impact of Revenue Expenditure
generate revenue. Supports Day-to-Day Operations
Directly Reduces Profit
Driving Question

Identify which type of receipt and expenditure


are in given picture?

@ASPSDubai
@ASPSDubai
Topic: Revenue expenditures and capital expenditures
LO: Accurately classify business expenditures into capital or revenue categories.

Success Criteria:
• Understand how capital and revenue expenditures affect the income statement and
balance sheet.
• Students can classify expenditures in given scenarios correctly and justify their
classifications
• Recognise the consequences of misclassifying expenditures and their impact on
accounting records.
Examples of Capital
Expenditure
• Purchase of land, buildings, or
equipment
• Construction of a new building or
addition to an existing building
• Major renovations or
improvements to an existing
building
• Purchase of vehicles or
machinery
Teach and Model

• Capital expenditure is money that is spent on non-current


assets for the long-term benefit of the business
• Capital expenditure includes:
• The purchase of non-current assets
• The delivery of non-current assets
• The installation of non-current assets
• The legal costs incurred with the non-current asset purchases
• The decoration of new non-current assets
• The extension of non-current assets
• e.g. increasing the size of a storage warehouse
• Capital expenditure is included in the statement of financial
position under the non-current assets section
• It is not included in the income statement
Some common examples of revenue expenditures include:

• Salaries and wages for employees


• Rent, utilities, and other regular bills
• Marketing and advertising expenses
• Office supplies and other consumables
Teach and Model

• Revenue expenditure is money that is spent on the day-to-day running


costs of the business
• Revenue expenditure includes:
• The purchase of goods for resale
• General expenses
• Insurance
• Training costs
• Repairs of non-current assets
• Redecoration of existing non-current assets
• Revenue expenditure is included in the income statement
• It is not included in the statement of financial position
• However, it will contribute to the profit or loss for the year, which is
recorded in the statement of financial position
Teach and Model
Mid - Plenary

https://www.acowtancy.com/textbook/acca-fa/d4-tangible-non-current-assets-/capital-and-re
venue-items/quiz?fsid=67884d08b581c41900d16e2be31c579f5a166e1e
Group 3

Ajax buys a new vehicle. The following table shows the


payments Ajax has made.

How much is the capital expenditure?


Group 4

Identify whether each cost contributes to revenue


expenditure or capital expenditure

Details Types of
expenditure
Cost of vehicle

Delivery cost of vehicle

Insurance

Fuel costs
Group 5

What are the effects What are the


of treating capital effects of treating
expenditure as revenue
revenue expenditure as
expenditure? capital
expenditure?
Effects of Incorrect Treatment of Expenditure
What are the effects of treating capital expenditure as revenue
expenditure?
• Incorrectly treating capital expenditure as revenue expenditure will affect
the financial statements
• It will incorrectly appear as an expense on the income statement
• The expenses will therefore be overstated
• This means the profit for the year will be understated
• It will not appear as a non-current asset on the statement of financial
position
What are the effects of treating revenue expenditure as capital expenditure?
• The non-current
• Incorrectly assets will
treating revenue therefore beasunderstated
expenditure capital expenditure will affect the
• The capital
financial will be understated because of the understated profit
statements
• It will not appear on the income statement
• The expenses will therefore be understated
• This means the profit for the year will be overstated
• It will incorrectly appear on the statement of financial position
• The non-current assets will therefore be overstated
LO: To Understand how capital and revenue expenditures affect the income
statement and balance sheet.

Assessment Criteria including WAGOLL Exemplars

Good Very Good Excellent

Define and distinguish between capital I can accurately classify business Recognize the consequences of
expenditure and revenue expenditure. expenditures into capital or revenue misclassifying expenditures and their impact
categories on accounting records.
Group 3

Assess the effect on a business of the incorrect treatment of capital expenditure and
revenue expenditure.
(Total for question = 6 marks)
(Q16c 4AC1/01, SAM 0)

Explain what distinguishes revenue expenditure from capital expenditure.


(5)

(Total for question = 5 marks)


(Q18b 4AC1/01, Nov 2021)
Group 4

(Total for question = 5 marks)


(Q12 4AC1/01, Jan 2020)
Group 5
Challenge
Worked Example
Ajax paid $2 000 for installation costs of new
equipment. He treated this as revenue
expenditure.
Describe what effects this will have on the
financial statements. Ignore any depreciation
costs.
Challenge

Answer
The $2 000 has been incorrectly posted to the
income statement as an expense. Therefore the
expenses are overstated by $2 000 which means
the profit is understated by $2 000.
The $2 000 has been omitted from the statement of
financial position. Therefore the non-current assets
are understated by $2 000. The capital is also
understated by $2 000 because the profit has been
understated.
Self Assessment - Challenge
Peer Assessment - Task
Challenge
Plenary
H.W

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