Capital Expenditure and Revenue Expenditure

Capital Expenditure

First I have to point out that Capital expenditure has nothing to do with the owner's Capital Account or Owners equity. These two terms have the same starting word but are two different items altogether.

When we talk of capital expenditure we are talking about expenses related to the acquisition of fixed assets or non current assets as they are called nowadays. This includes both the buying of fixed assets and also expenses to add to the value of existing fixed assets.

What to Include in Determining Capital Expenditure

IAS 16 stipulates that costs that are deemed are as follows:-

• The actual spend on acquiring the fixed asset.
• the costs of bringing it into the business e.g. delivery costs.
• legal expenses of buying buildings 
• carriage inwards on machinery bought.
• Non refundable import taxes
• any other costs need to make the fixed asset ready for use e.g. installlation costs..

Revenue Expenditure

Expenses that are incurred in day to day running the business are termed as revenue expenditure. As already pointed out costs that are for increasing the value of a fixed assets are capital expenses and are therefore not revenue expenses.

To illustrate the difference in revenue and capital expenditure lets take the example of vehicle. Costs of buying the vehicle is capital expenditure whereas costs for running it such as repairs and fuel costs are revenue expenditure. Repairs and fuel costs do not add to the value of the asset i.e. the vehicle and only for a short time.

Accounting Treatment of Revenue and Capital Expenditure

All revenue expenditure goes to the revenue statement or as it is called in some circles the statement of profit and loss, whereas capital expenditure goes to Fixed Assets (Non Current Assets) in the Statement of Financial Position (Balance Sheet).

As a preparer of financial statement one has to be mindful of this and make sure that any  misposting is corrected and reposted to the correct account before you finalise your financial reporting.

One also has to be mindful of expenditures that cover both capital and revenue expenditure in the same expenditure. It is the duty of the person posting to make sure that there is proper splitting of the costs. 

An example could be a case painting where one part is painting for a new building and the other is for an old building. The first one is capital expenditure and needs to be added to the value of the house as an asset while the second one is a revenue expenditure  and should therefore be posted to the income statement or statement of financial position.

Loan Interest

There has always been a debate on the treatment of loan interest incurred in acquiring fixed assets. Some accountants would argue that loan interest is not part of the costs of acquiring the asset but rather a finance costs that should go to the income statement. 

However IFRS.... has now allowed the treatment as capital expenditure of loan interest incurred in the construction of a fixed asset.

Costs That May Not Be Capitalised As Per IAS 16

• Insurance costs
• Repairs
• Manintenance

Exercise:

Classify the following costs as capital or revenue expenditure:

• Purchase of a new car
• Purchase of fuel
• Insurance
• New Tyres