9706 · 1.3.1
Capital and revenue income and expenditure flashcards
Revision flashcards for Cambridge 9706 Capital and revenue income and expenditure (syllabus 1.3.1). Flip, recall, then mark a real past-paper question.
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Capital expenditure example?
Purchase of machinery, delivery and installation costs, legal fees on property acquisition.
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Revenue expenditure example?
Repairs, rent, wages, advertising, vehicle road tax.
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Repairs vs improvement?
Improvement is capital expenditure as it enhances an asset's earning capacity or life. Routine maintenance (repairs) is revenue expenditure.
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Capital receipt?
Proceeds from the sale of a non-current asset. The profit or loss on disposal is shown in the SPL, not the full proceeds.
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Revenue income?
Sales, commission received, rent received, interest received from bank.
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Prudence link?
Do not capitalise costs that should be expensed to inflate profit. However, prudence does not justify incorrectly expensing capital items.
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What is capital expenditure?
Expenditure on acquiring or significantly improving non-current assets, which provides economic benefits for more than one accounting period. It is recorded on the Statement of Financial Position.
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How is revenue expenditure treated in the financial statements?
It is charged in full as an expense to the Statement of Profit or Loss in the accounting period in which it is incurred.
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Is the cost of delivering and installing a new machine capital or revenue expenditure?
Capital expenditure. All costs necessary to bring a non-current asset to its location and condition for its intended use are capitalised as part of the asset's cost.
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What is the effect on profit of incorrectly treating a £10,000 repair bill as the purchase of a new asset?
Profit for the period will be overstated. The £10,000 revenue expense is not charged to the SPL. Instead, only a small depreciation charge might be, leading to artificially high profit.
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A business sells an old machine. What part of this transaction is recorded in the Statement of Profit or Loss?
The profit or loss on disposal. This is calculated as the difference between the sales proceeds and the net book value (cost less accumulated depreciation) of the machine at the time of sale.
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What is the accounting treatment for legal fees incurred when purchasing a property?
Capital expenditure. They are part of the cost of acquiring the asset and should be added to the property's cost on the SOFP.
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A business spends $20,000 on a major advertising campaign expected to boost sales for 3 years. Is this capital expenditure?
No. Despite the potential long-term benefit, advertising is treated as revenue expenditure and expensed in the year it is incurred. This is due to the uncertainty in quantifying the future economic benefits.