Capital & Revenue Expenditure & Receipts (Cambridge (CIE) IGCSE Accounting): Flashcards
Exam code: 0452 & 0985
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Define capital expenditure.
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Cards in this collection (23)
Define capital expenditure.
Capital expenditure is money spent on non-current assets for the long-term benefit of the business. It appears in the statement of financial position, never in the statement of profit or loss.
Give three costs that are capital expenditure besides the purchase price.
Capital expenditure also covers the cost of:
delivering the asset
installing it
legal costs on the purchase
decorating it when new, and extending it later
Define revenue expenditure.
Revenue expenditure is money spent on the day-to-day running costs of the business. It appears in the statement of profit or loss, never as an asset in the statement of financial position.
True or False?
Extending an existing warehouse is capital expenditure.
True.
An extension makes the asset bigger and gives the business long-term benefit, so it is capital expenditure. A repair would not be, because it only keeps the asset working as before.
Complete the sentence about buying goods:
Buying goods for resale is
expenditure, however large the sum involved.The completed sentence is:
Buying goods for resale is revenue expenditure, however large the sum involved.
Why is decorating a new asset treated differently from redecorating an old one?
Decorating a new asset is part of getting it ready to use, so it is capital expenditure. Redecorating an existing one only maintains what is already there, which is a running cost and so revenue expenditure.
A vehicle costs $27 500, with delivery $300, insurance $800 and fuel $400. What is the capital expenditure?
The capital expenditure is $27 800. Only the vehicle and its delivery are capital, so $27 500 + $300 = $27 800, while the insurance and fuel are running costs.
Define a capital receipt.
A capital receipt is money received from something outside the business's day-to-day trading. Capital receipts are one-off, and they never appear in the statement of profit or loss.
Give three examples of capital receipts.
Capital receipts include:
capital introduced by the owner
money received from a loan
the proceeds from selling a non-current asset
Define a revenue receipt.
A revenue receipt is money received from the business's day-to-day trading. Revenue receipts are regular, and they do appear in the statement of profit or loss.
Give three examples of revenue receipts.
Revenue receipts include:
the sale of goods
commission received
rent received and interest received
True or False?
Only the profit or loss on selling a non-current asset reaches the statement of profit or loss, not the sale proceeds.
True.
The proceeds are a capital receipt and stay out of the statement of profit or loss altogether. Only the profit or loss on the sale goes there, and it is worked out against the asset's net book value rather than its original cost.
Which parts of the statement of financial position can a capital receipt affect?
It can change the non-current assets, the current assets, the non-current liabilities or the capital. Selling an asset reduces non-current assets, taking a loan increases non-current liabilities, and money coming in raises the bank balance.
Complete the sentence about revenue receipts:
Revenue receipts do not appear in the statement of financial position, but they contribute to the
for the year, which is reported there.The completed sentence is:
Revenue receipts do not appear in the statement of financial position, but they contribute to the profit for the year, which is reported there.
Capital expenditure is wrongly treated as revenue expenditure. What are the effects?
Expenses are overstated, so the profit is understated. In the statement of financial position the non-current assets are understated, and the capital is understated too because of the lower profit.
True or False?
Some non-current assets should be treated as expenses rather than as assets.
True.
Low-value items such as calculators, staplers and waste bins are treated as expenses instead. Recording and tracking them as assets would cost the business more effort than the information is worth.
Revenue expenditure is wrongly treated as capital expenditure. What are the effects?
Expenses are understated, so the profit is overstated. The non-current assets are overstated, and the capital is overstated too because of the higher profit.
Complete the sentence about low-value items:
The accounting principle that allows cheap non-current assets to be treated as expenses is
.The completed sentence is:
The accounting principle that allows cheap non-current assets to be treated as expenses is materiality.
A capital receipt is wrongly treated as a revenue receipt. What is the effect?
Its full value appears as income in the statement of profit or loss, so the income is overstated. That in turn overstates the profit for the year.
A revenue receipt is wrongly treated as a capital receipt. What is the effect?
It never reaches the statement of profit or loss, so the income is understated. That in turn understates the profit for the year.
Why does misclassifying expenditure affect the capital as well as the profit?
The profit for the year is transferred to the capital account at the end of the period. Anything that misstates the profit therefore misstates the capital by the same amount.
$2000 of installation costs for new equipment was treated as revenue expenditure. What are the effects?
Expenses are overstated by $2000, so the profit is understated by $2000. The non-current assets are understated by $2000, and the capital is understated by $2000 as well.
A draft profit of $45 700 includes a $10 000 bank loan treated as a revenue receipt. What is the correct profit?
The correct profit is $35 700. A loan is a capital receipt and should never have been counted as income, so $45 700 − $10 000 = $35 700.
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