Accounting Igcse Cie
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The-Trial-Balance-And-Correction-Of-Errors Igcse Cie4 主题
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Control-Accounts Igcse Cie3 主题
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Sole-Traders Igcse Cie
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Incomplete-Records Igcse Cie4 主题
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Capital-And-Revenue-Expenditure Igcse Cie
Exam code:0452 & 0985
Capital expenditure
What is capital expenditure?
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Capital expenditure is money that is spent on non-current assets for the long-term benefit of the business
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Capital expenditure includes:
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The purchase of non-current assets
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The delivery of non-current assets
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The installation of non-current assets
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The legal costs incurred with the non-current asset purchases
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The decoration of new non-current assets
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The extension of non-current assets
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e.g. increasing the size of a storage warehouse
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Capital expenditure is included in the statement of financial position under the non-current assets section
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It is not included in the income statement
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Revenue expenditure
What is revenue expenditure?
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Revenue expenditure is money that is spent on the day-to-day running costs of the business
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Revenue expenditure includes:
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The purchase of goods for resale
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General expenses
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Insurance
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Training costs
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Repairs of non-current assets
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Redecoration of existing non-current assets
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Revenue expenditure is included in the income statement
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It is not included in the statement of financial position
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However, it will contribute to the profit or loss for the year, which is recorded in the statement of financial position
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Worked Example
Ajax buys a new vehicle. The following table shows the payments Ajax has made.
|
$ |
|
|
Cost of the vehicle |
27 500 |
|
Delivery cost of the vehicle |
300 |
|
Insurance |
800 |
|
Fuel costs |
400 |
How much is the capital expenditure?
Answer
Identify whether each cost contributes to revenue expenditure or capital expenditure.
|
Type of expenditure |
|
|
Cost of the vehicle |
Capital |
|
Delivery cost of the vehicle |
Capital |
|
Insurance |
Revenue |
|
Fuel costs |
Revenue |
Add together the costs that contribute to capital expenditure.
$27 500 + $300 = $27 800
Effects of incorrect treatment of expenditure
What are the effects of treating capital expenditure as revenue expenditure?
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Incorrectly treating capital expenditure as revenue expenditure will affect the financial statements
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It will incorrectly appear as an expense on the income statement
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The expenses will therefore be overstated
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This means the profit for the year will be understated
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It will not appear as a non-current asset on the statement of financial position
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The non-current assets will therefore be understated
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The capital will be understated because of the understated profit
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What are the effects of treating revenue expenditure as capital expenditure?
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Incorrectly treating revenue expenditure as capital expenditure will affect the financial statements
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It will not appear on the income statement
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The expenses will therefore be understated
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This means the profit for the year will be overstated
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It will incorrectly appear on the statement of financial position
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The non-current assets will therefore be overstated
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The capital will be overstated because of the overstated profit
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How do I treat low-valued non-current assets?
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Some non-current assets have a small cost to the business
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Calculators
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Staplers
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Waste bins
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The accounting principle of materiality means that a business should treat these items as expenses rather than non-current assets
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These will appear on the income
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These will not appear as non-current assets on the statement of financial position
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Worked Example
Ajax paid $2 000 for installation costs of new equipment. He treated this as revenue expenditure.
Describe what effects this will have on the financial statements. Ignore any depreciation costs.
Answer
The $2 000 has been incorrectly posted to the income statement as an expense. Therefore the expenses are overstated by $2 000 which means the profit is understated by $2 000.
The $2 000 has been omitted from the statement of financial position. Therefore the non-current assets are understated by $2 000. The capital is also understated by $2 000 because the profit has been understated.
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