4.1 Capital and Revenue Expenditure and Receipts

This section explains the difference between capital and revenue expenditure and receipts, and how to account for them in a business's financial records. Understanding this distinction is crucial for accurately portraying a company's financial health.

Capital Expenditure

Capital expenditure is spending by a business on assets that are expected to provide benefits for more than one accounting period. These are investments in the long-term future of the business.

Characteristics of Capital Expenditure:

• Increases the value of the business.
• Provides benefits for more than one year.
• Is not usually expensed in the same period as the purchase.

Examples of Capital Expenditure:

• Purchase of a new building.
• Purchase of machinery.
• Purchase of a vehicle.
• Significant improvements to existing assets that extend their useful life.

Accounting for Capital Expenditure:

Capital expenditure is not typically recorded as an expense in the income statement in the year it is incurred. Instead, it is recorded as an asset on the balance sheet. The asset is shown at its cost less any accumulated depreciation.

The initial entry involves debiting the relevant asset account (e.g., 'Plant and Equipment') and crediting the cash or bank account.

Revenue Expenditure

Revenue expenditure is spending by a business on assets or services that are consumed within the current accounting period. These are costs incurred to maintain the day-to-day operations of the business.

Characteristics of Revenue Expenditure:

• Does not significantly increase the value of the business.
• Provides benefits for only one accounting period.
• Is usually expensed in the same period as the purchase.

Examples of Revenue Expenditure:

• Salaries and wages.
• Rent.
• Utilities (electricity, gas, water).
• Repairs and maintenance (routine).
• Advertising.
• Office supplies.

Accounting for Revenue Expenditure:

Revenue expenditure is recorded as an expense in the income statement in the period in which it is incurred. This reduces the profit of the business for that period.

The initial entry involves debiting the relevant expense account (e.g., 'Salaries Expense') and crediting the cash or bank account.

Capital Receipts

Capital receipts are money received by a business from sources that are not directly related to the day-to-day operations. These are often investments or long-term funding.

Examples of Capital Receipts:

• Sale of a fixed asset (e.g., a piece of equipment).
• Investment income (e.g., interest received on a long-term loan).
• Capital investment from owners.
• Grants received for capital expenditure.

Accounting for Capital Receipts:

Capital receipts are recorded as a credit to a specific capital account. This account is typically shown on the balance sheet as part of the owner's equity.

Revenue Receipts

Revenue receipts are money received by a business from its normal day-to-day operations, such as the sale of goods or services.

Examples of Revenue Receipts:

• Sales revenue.
• Service revenue.
• Interest received on current loans.

Accounting for Revenue Receipts:

Revenue receipts are recorded as a credit to a specific revenue account. This account is typically shown on the income statement as part of the profit and loss account.

Summary Table

Category	Nature	Accounting Treatment	Financial Statement Impact
Capital Expenditure	Investment in long-term assets	Debited to Asset Account, Credited to Cash/Bank	Balance Sheet (as an asset)
Revenue Expenditure	Day-to-day operating costs	Debited to Expense Account, Credited to Cash/Bank	Income Statement (as an expense)
Capital Receipts	Non-operating income (e.g., asset sale)	Credited to a Capital Account	Balance Sheet (as part of owner's equity)
Revenue Receipts	Income from normal business activities (e.g., sales)	Credited to a Revenue Account	Income Statement (as revenue)