1. Capital and Revenue Expenditure

2. How profit is calculated
Revenue Minus Cost of Goods Sold = Gross Profit Expenses = Net Profit

3. The matching/accruals principle
This basic principle of accounting states that in determining a firm’s profit, any income should be matched with the expenditure involved in creating that income

4. Example A firm is trying to calculate it’s monthly profit figures.
Electricity is paid quarterly…… $1,200 is paid every January, April, July and October
Should electricity expenses be recorded as $0 for February?

5. Example
A firm has spent $20,000 on raw materials in the current financial year.
However there was $7,000 of stock at the start of the year and $4,000 at the end of the year….. What amount should be recorded as the raw materials cost?

6. Types of Expenditure Expenditure is when a business spends money.
We categorise business expenditure into either:
Capital Expenditure
Revenue Expenditure

7. Capital Expenditure
Occurs when the business spends money on purchasing fixed assets, or adding to the value of existing assets

8. Revenue expenditure
Spending money on day to day running costs for the business

9. Joint Expenditure
Occasionally an expense will be partially capital and partially revenue expenditure.
For example building work that is patially a repair and partially an improvement

10. Capital or Revenue?
Purchasing Premises

11. Capital or Revenue?
Repairs to machinery

12. Capital or Revenue?
Rent

13. Extension of office block
Capital or Revenue?
Extension of office block

14. Capital or Revenue?
Electricity

15. Capital or Revenue?
Buying new Machinery

16. Adding Air Conditioning to a room
Capital or Revenue?
Adding Air Conditioning to a room

17. Capital or Revenue?
Redecorating offices

18. Why?
Fixed assets are going to stay in the business for a long period of time
For example: It would therefore be unfair to count the purchase of a van as an expense for 2007 when it would continue to be used for the next 3 years.
If we did this expenses figures would be too high for 2007 and too low for the other 2 years
This would make profit look too low in 2007 and too high in the other years

19. Expenditures and accounts
Revenue Expenditure – Is recorded as an expense on the profit and loss account
Capital Expenditure – Is recorded as an increase in Asset in the Balance Sheet and the expense will be spread over the useful life of the asset in the form of Depreciation