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Explain what is meant by capital and revenue expenditure, indicating why the distinction is important.

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Introduction

Capitalisation and Depreciation 1. Explain what is meant by capital and revenue expenditure, indicating why the distinction is important. According to Hall et al. (2009), expenditures below could be separated into two categories - capital expenditure and revenue expenditure. Generally speaking, a start-up needs finance which is say - the initial expenditure-- to buy such as raw materials, and equipment. If getting successes, it can earn money back from sales; however, it needs to be used to repeat what they have done with initial expenditure, i.e. continuously to buy raw materials and other settlements (Hall et al., 2009). What's more, businesses will be expended when the owners want to. Therefore, extra money will be needed over the previous sales scale to obtain larger premises, more equipment and workforce. ...read more.

Middle

Owing to there are some grey areas between capital expenditure and revenue expenditure, temptations sometimes appear to make capital expenditure treatment look like revenue expenditure. There are enhancement of profits come with higher asset results showing on the balance sheet when depreciation expenditure is made more like as improvements to fixed assets. To start a cafe, for example, it needs coffee machines, a shop and other fixed assets all fall into capital expenditure. Besides, coffee bean, wages are all examples for revenue expenditure. 2. a. Explain what is meant by depreciation and why it is used in accounting for fixed assets. Depreciation is a measure of the allocation of inevitably scope for differences of view on the useful economic life of non-current assets' value that has been used up in the specific financial period (Perks & Leiwy, 2010; Hall et al., 2009; Thomas & Ward, 2009; Black, 2009). ...read more.

Conclusion

As an example, heel of a shoe will definitely suffer a lot of wear and tear sooner or later. And these kind of things will have to be took place in the end. Secondly, obsolescence through technological change often causes assets depreciated (Thomas & Ward, 2009). Typically, IT products, for instance, there is a new type of mobile phone launch on sale in every few months. The new one has no doubt been improved than the old one. Some consumers will buy a new one even though their previous mobile still work. Then, goods which are lack of maintenance could be a cause of depreciation (Hall et al., 2009). And the last cause is the passing of time. It means, for example, food in supermarket will be re-priced when their expiry date is getting closer and closer. ...read more.

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