All transactions can be broadly divided into two types:
Capital can be recognised because we have something left at the end of the period to put into the balance sheet e.g. Purchase of extra machinery for £3000
Revenue the item is ‘used up’ during the period and therefore is posted to the Profit & Loss as an expense. e.g. Pay the gas bill £250
One item which does not quite fit the bill is Stock because that is partly ‘used up’ but there is still some left to go into the balance sheet. The solution is quite simple: we do not actually buy or sell ‘Stock’ We make Purchases and these get ‘used up’ when they are turned into stock We make Sales and these get ‘used up’ when they are turned into debtors or cash. – These are both, therefore, revenue items.
Method
| Before : | Asset (van) = | £0 |
| After : | Asset (van) = | £5,000 |
Learn to use the following “before and after” method to decide: First example We buy a delivery van for £5000
Conclusion
An asset has appeared on the Balance Sheet worth £5000 so this must be capital expenditure.
NB: capital expenditure includes all costs involved in obtaining the asset.
- Solicitors costs involved in the conveyancing of a property
- Engineers costs to commission a new piece of machinery
- Delivery charges when we buy new office furniture
Second example The van breaks down and we pay £300 to have it repaired
| Before : | Asset (van) = | £5,000 |
| After : | Asset (van) = | £5,000 |
Second Conclusion
No change to the value of assets in the balance sheet, therefore this is revenue expenditure
One final complication!
Sometimes an item is not completely “used up” during the accounting period – what if we pay the rent for the next 12 months in September and our year end is only 3 months later? In this case the unused part of the rent is carried over in the balance sheet as a prepayment in the current assets section. The same applies to unsold stock at the end of the period. These are still classed as revenue expenditure.
Video – Pease watch this video on Capital / Revenue Transactions to learn more
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