Accounting for Capital Transactions Capital v revenue Cost of non-current assets Authorising capital expenditure Methods of funding Double entry Disposals Part exchange Non-current asset register Reconciliation TITLE HERE 00 MONTH 0000

Capital and Revenue Expenditure Business expenditure can be split into two main categories - Capital expenditure and Revenue Expenditure. The distinction between the capital and revenue expenditure is important because accounting treatment of each type of expenditure is different. A.Malik

Is expenditure on items that are to be: - sold by the business,(trade) Capital expenditure Revenue expenditure Is expenditure incurred on the purchase (acquisition), manufacture, replacement, alteration or improvement of non- current asset. Expenditure on items that are acquired and retained to be used in the business over a long period of time (more than one year), known as non-current assets (fixed assets). Is the day to day expense of running the business- i.e. will be used up by the business quickly. Is expenditure on items that are to be: - sold by the business,(trade) or/and - consumed by the business within the accounting period. For trade of the business or to Repair, maintain or service a non-current asset A.Malik

Capital expenditure Revenue expenditure E.g. purchase of Land & Building, machinery, equipment, motor vehicles for use in the business, furniture and fittings, computer equipment improvement but not repair of fixed assets legal cost of buying a property installation of fixed asset Improvement in the earning capacity of non-current asset. E.g .purchase of items of inventory for resale and expenses (gas, electric, phone, etc.) Expenditure to maintain (rather than improve) the earning capacity of non-current asset. e.g repairs to a car A.Malik

Accounting treatment: Capital expenditure Revenue expenditure Accounting treatment: Record as an asset in the Statement of Financial Position (Balance Sheet). Capital items alter the composition of net assets. Accounting treatment: Treated as expenses and deducted from Statement of Profit and Loss, in order to reach a profit figure for the period Revenue items affect the calculation of profit. A.Malik

Capital and Revenue Expenditure Non-current assets Revenue expenditure Capitalised SOPL SOFP

Capital Trasactions These concern all aspects of non-current assets Non-current assets are ‘TANGIABLE’ items that are: Held for use in production or supply of goods or services Kept longer than one year

Criteria for capitalising an asset the purpose for which an item is acquired and - (long- term use) the useful life of an item (longer than 1 period) future economic benefits will be gained from the asset cost is reliably measurable Capital expenditure is the addition, replacement or improvement of non-current assets Following the accruals concept to match the cost of an asset to the income generated

Capitalisation Policy Set by the business as the level of expenditure above which items are capitalised E.g over £500 Items under £500 will be shown in SOPL as revenue expense even if they fit the non-current asset definition Materiality

Cost of non-current assets: What costs can be included in the cost on NCA ie capitalised? ACCOUNTS PREPARATION

VAT and non-current assets If the business is VAT registered then assets are recorded net of VAT If the business is not VAT registered then assets are recorded inclusive of VAT – i.e the VAT is also capitalised

Ilustration 1: Capitalisation policy Scenario (a) LH has a policy of capitalising expenditure over £400 and subsequently purchases a printer for £200. Question: Will the printer be capitalised as a non-current asset? TITLE HERE 00 MONTH 0000

Illustration 2 Cost of the asset On 10th December 20X7 a business bought a machine. The policy is to capitalise expenditure over £300. The breakdown on the invoice showed: At what amount should the machine be capitalised in the entity’s records? Ignore VAT. £ Cost of machine 20,000 Delivery costs 200 One-year maintenance contract 800 Installation costs 500 21,500 TITLE HERE 00 MONTH 0000

Illustration 2 Cost of the asset Answer: £ 20,700 Purchase price (20,000) + all directly attributable costs (Delivery cost £200 + installation £500). The cost of the maintenance contract (£800) should be shown as an expense in the statement of profit or loss. TITLE HERE 00 MONTH 0000

Examples: Study examples in tutorial page 143/4 Study table page 144

You Try: Activities 8.11 to 8.13 Osborne Tutorial pg 152

Activity: Indicate whether the following costs will be classified as capital expenditure or revenue expenditure. Cost Capital Revenue expenditure Purchase of premises Legal fees relating to the purchase of premises Cost of building an extension to the premises Repairs to premises Depreciation charge for premises Delivery cost of new vehicles Fuel for vehicles Insurance of vehicles A.Malik

Solution: Indicate whether the following costs will be classified as capital expenditure or revenue expenditure. Cost Capital Revenue expenditure Purchase of premises X Legal fees relating to the purchase of premises Cost of building an extension to the premises Repairs to premises Depreciation charge for premises Delivery cost of new vehicles Fuel for vehicles Insurance of vehicles A.Malik

Accounting for non- current assets Case study: Page 155 Osborne Tutorial Accounting for non- current assets Situation follows

On the 4th Jan 2001, a company buys a computer for use in the office, the cost is £2,000 + VAT @ 20% The computer is depreciated using the straight line method at a rate of 25% of cost each year The company’s policy is to charge a full year depreciation in the year of purchase but, none in the year of sale On July 12th 2004 the computer is sold for £400 + VAT @ 20%, payment is received into the bank.

you are to: Show the journal entries to record: Acquisition of the computer Depreciation Disposal

Solution: Aquisition Date Details Reference DR CR 2001 04/01 Computer VAT Bank Purchase of computer for use in office, capital expenditure authorisation No 015/20-1 GL £ 2,000 400 2,400 Study ledger accounts and journal entries pages 156-158

Disposals ACCOUNTS PREPARATION

Disposals (cont’d) ACCOUNTS PREPARATION

Case Study Continued Tutorial Osborne Pages 158-160 Study the journal and ledger account postings TITLE HERE 00 MONTH 0000

Authorising capital expenditure ACCOUNTS PREPARATION

Non-current asset register ACCOUNTS PREPARATION

Non-Current Asset Register Study layout of Non-Current Asset Register page 163 Osborne Tutorial TITLE HERE 00 MONTH 0000

Reconciliation ACCOUNTS PREPARATION

Methods of funding Non-Current Assets Note: In AAT assessments you could be asked to identify the most suitable method of funding. ACCOUNTS PREPARATION

Double entry ACCOUNTS PREPARATION

Double entry (cont’d) ACCOUNTS PREPARATION

Disposals (2) ACCOUNTS PREPARATION

Part exchange ACCOUNTS PREPARATION

You Try: Class activities Osborne Tutorial 9.1 to 9.8 TITLE HERE 00 MONTH 0000

Homework/Structured Learning - Wk 9 Read chapter 9 in your tutorial book and complete all activities Complete all activities in workbook- chapter 9 Complete the questions (handout): Osborne Tutor zone chapter 9 – will collect next week for marking. Optional: