1. 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 MONTH 0000

2. 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

3. 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

4. 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

5. 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

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

7. 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

8. 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

9. 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

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

11. 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

12. 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 MONTH 0000

13. 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 MONTH 0000

14. 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 MONTH 0000

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

16. You Try:
Activities 8.11 to 8.13 Osborne Tutorial pg 152

17. 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

18. 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

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

20. On the 4th Jan 2001, a company buys a computer for use in the office, the cost is £2, % 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 £ %, payment is received into the bank.

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

22. 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

23. Disposals
ACCOUNTS PREPARATION

24. Disposals (cont’d)
ACCOUNTS PREPARATION

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

26. Authorising capital expenditure
ACCOUNTS PREPARATION

27. Non-current asset register
ACCOUNTS PREPARATION

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

29. Reconciliation
ACCOUNTS PREPARATION

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

31. Double entry
ACCOUNTS PREPARATION

32. Double entry (cont’d)
ACCOUNTS PREPARATION

33. Disposals (2)
ACCOUNTS PREPARATION

34. Part exchange
ACCOUNTS PREPARATION

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

36. 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: