Capital vs revenue expenditure

Capital and Revenue expenses Capital expenditure occurs when a business spends money in purchasing non-current assets for the business operations or when it spends money in adding value or improving an existing non-current asset. This will include delivery and legal costs in acquiring the non-current assets.

Non-current assets are items owned by the business which have some longevity and will be used for a long period of time within the business. These are commonly known as fixed assets. Examples of these include buildings, machinery, furniture, motor vehicles etc.

When a business buys a new machine, this is classified as a capital expenditure and is accounted for in the statement of financial position over a few years, because of the longevity of the use of the machinery in the business.

Revenue expenditure are all other expenditure outside capital expenditure incurred by a business in carrying out its daily operations. Such expenditure will include costs incurred in the acquisition of current assets acquired for conversion into cash; costs incurred in purchasing and selling of goods; day-to-day administration or operating costs; and costs incurred in maintaining the revenue-earning capacity of the non-current assets.

All such expenditure is charged to the statement of profit or loss, because such expenditure are usually used up within a short period of time and don't add value to any existing non-current assets.

The differences between capital and revenue expenditure can be illustrated using a motor vehicle:

Expenditure                                         Type of expenditure 

Cost of the motor vehicle                    Capital

Petrol for the vehicle                           Revenue

Repairs to the vehicle                          Revenue

Headlights for the vehicle                   Capital

Servicing the vehicle                           Revenue

Body work & spraying the vehicle     Capital

Foot mats for the vehicle                     Revenue

The Non Current Asset Register

Non-Current Asset Register Non-current assets can turn out to be large amounts of expenditure in some businesses and these will require some control measures being put in place to ensure the costs are being monitored. 

In setting controls in place, many businesses maintain a non-current assets register in addition to the general ledger entries. The non-current assets register is used to record all relevant information of all the non-current assets owned by the business. It helps act as a control mechanism to monitor the existence of non-current assets and to act as a check on the relevant non-current assets general ledger balances. 

There is no set format for the register, as businesses can add in information useful specifically to its operations. Information contained in the non-current assets register may include: 

-Assets description 

-Assets location 

-Date of purchase 

-Purchase price 

-Depreciation method 

-Depreciation charge for the year 

-Accumulated depreciation to date 

-Estimated useful life 

-Net book value 

-Location of assets 

-Disposal date 

-Proceeds from disposal 

 -Gain or loss on disposal 

-Estimated residual value 

An example of a non-current assets register layout, could be as below;

In the non-current assets register layout above, the cost column is used to record the total capitalised cost of the asset (net amount without VAT); the depreciation charge is the yearly depreciation charged on the asset and the carrying amount is the difference between the cost and the accumulated depreciation to date, which is commonly known as the net book value of the asset. 

There needs to be regular checks put in place to ensure that the all non-current assets recorded by the business are actually still existing and in use by the business and to ensure that all non-current assets owned by the business are correctly recorded in the non-current assets register. 

These physical checks could reveal discrepancies and this could be as a result of the non current assets register not being updated with disposals, acquisitions or depreciation that could have taken place during the year. 

Where this is the case, the non-current assets register will need to be updated with the relevant information. Where it is not the case of the non-current assets register needing to be updated, it could then be a discrepancy resulting from a lack of controls in the organisation which could have led to theft or undisclosed damage. Any such discrepancies must be investigated and resolved or reported to the management for appropriate actions to be taken.