IGCSE Capital & Revenue Receipt & Expenditure
We will learn how to identify and calculate capital and revenue receipt, and capital and revenue expenditure. We also learn how to record these transactions in the journal, and the effect of wrong accounting treatment of capital and revenue receipt and expenditure will have on profit for the year, assets and owner’s equity.
Related Lessons:
Accounting for Capital Expenditure
Capital expenditure refers to the cost incurred to acquire assets which benefit will last the business for more than one accounting period. Therefore, capital expenditure is recorded as Non-Current Assets.
To calculate the cost of capital expenditure,
Original purchase price – Discounts + Cost incurred to bring asset to usable state (e.g. installation cost, delivery cost)
Example:
Cost of air-conditioning $8,000
Discount 10%
Delivery cost $200
Installation cost $300
Total cost of capital expenditure = (8,000 x 90%) + 200 + 300 = $7,700
To record capital expenditure:
Dr Non-current asset
Cr Cash at bank or Other payable
When capital expenditure is wrongly recorded as revenue expenditure, the business expense will be overstated, which leads to profit being understated. The total asset and owner’s equity of the business will also be understated.
Accounting for Revenue Expenditure
Revenue expenditures are cost incurred to maintain the asset where the benefit will last the business for one accounting period. Therefore, it is recorded as an Expense.
The cost of revenue expenditure is the actual cost incurred.
Example:
Maintenance cost of air-conditioning $200
Total cost of revenue expenditure is therefore $200.
To record revenue expenditure:
Dr Expense
Cr Cash at bank or Cash in hand
When revenue expenditure is wrongly recorded as capital expenditure, the business expense will be understated, which leads to profit being overstated. The total asset and owner’s equity of the business will also be overstated.
Accounting for Capital & Revenue Receipt
Capital receipt refers to income obtained from investment and financing activities of the business. Examples include issuance of shares, capital contribution from owner, loan from financial institutions or banks, government grants.
This benefits the business for more than one accounting period. Therefore, capital receipt is recorded as Non-Current Liabilities or Capital.
The amount of capital receipt to be recorded is the actual amount invested.
To record capital contribution to the business by its owner:
Dr Cash or Bank
Cr Capital
To record other capital receipt, for example loan:
Dr Bank
Cr Loan
When capital receipt is wrongly recorded as revenue receipt, income will be overstated, which leads to profit being overstated. There is no effect on owner’s equity.
Revenue receipt refers to income obtained through normal business operations. Example sales of goods or services, discount received, dividend income, interest income.
This benefit will last the business for one accounting period. Therefore, it is recorded as an Income.
The amount of revenue receipt to be recorded is the actual amount earned.
To record revenue receipt:
Dr Cash or Bank
Cr “specific income earned”
When revenue receipt is wrongly recorded as capital receipt, income will be understated, which leads to profit being understated. There is no effect on owner’s equity.