Explain what is meant by capital and revenue expenditure, indicating why the distinction is important.
Capitalisation and Depreciation
- 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.
To put it simple, Perks & Leiwy (2010) indicated that capital expenditure is spending on items which will be shown on the balance sheet. Due to it adds to the purchase of fixed assets, under which the heading ‘non-current assets’, also, including the maintenance and repair of buildings and machines which are as depreciation as well. These amounts are carried forward as part of the next year’s opening statement of accounting position due to its contribution on several periods’ revenues (Thomas & Ward, 2009). Appearing on the income statement, showing the payments for goods and services which immediately against profit, are considered as revenue expenditure (Perks & Leiwy, 2010). Revenue expenditure represents business costs or expenses; however, the maintenance and repair of buildings and machines are included (Perks & Leiwy, 2010; Hall et al., 2009; Stickney, Weil & Davidson, 1991)