Capital and Revenue Expenditure. How profit is calculated Revenue Minus Cost of Goods Sold = Gross...

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Capital and Revenue Expenditure

Transcript of Capital and Revenue Expenditure. How profit is calculated Revenue Minus Cost of Goods Sold = Gross...

Page 1: Capital and Revenue Expenditure. How profit is calculated Revenue Minus Cost of Goods Sold = Gross Profit Minus Expenses = Net Profit.

Capital and Revenue Expenditure

Page 2: Capital and Revenue Expenditure. How profit is calculated Revenue Minus Cost of Goods Sold = Gross Profit Minus Expenses = Net Profit.

How profit is calculated

Revenue MinusCost of Goods Sold= Gross ProfitMinusExpenses= Net Profit

Page 3: Capital and Revenue Expenditure. How profit is calculated Revenue Minus Cost of Goods Sold = Gross Profit Minus Expenses = Net Profit.

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

Page 4: Capital and Revenue Expenditure. How profit is calculated Revenue Minus Cost of Goods Sold = Gross Profit Minus Expenses = Net Profit.

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?

Page 5: Capital and Revenue Expenditure. How profit is calculated Revenue Minus Cost of Goods Sold = Gross Profit Minus Expenses = Net Profit.

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?

Page 6: Capital and Revenue Expenditure. How profit is calculated Revenue Minus Cost of Goods Sold = Gross Profit Minus Expenses = Net Profit.

Types of Expenditure

• Expenditure is when a business spends money.• We categorise business expenditure into

either:• Capital Expenditure• Revenue Expenditure

Page 7: Capital and Revenue Expenditure. How profit is calculated Revenue Minus Cost of Goods Sold = Gross Profit Minus Expenses = Net Profit.

Capital Expenditure

• Occurs when the business spends money on purchasing fixed assets, or adding to the value of existing assets

Page 8: Capital and Revenue Expenditure. How profit is calculated Revenue Minus Cost of Goods Sold = Gross Profit Minus Expenses = Net Profit.

Revenue expenditure

• Spending money on day to day running costs for the business

Page 9: Capital and Revenue Expenditure. How profit is calculated Revenue Minus Cost of Goods Sold = Gross Profit Minus Expenses = Net Profit.

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

Page 10: Capital and Revenue Expenditure. How profit is calculated Revenue Minus Cost of Goods Sold = Gross Profit Minus Expenses = Net Profit.

Capital or Revenue?

Purchasing Premises

Page 11: Capital and Revenue Expenditure. How profit is calculated Revenue Minus Cost of Goods Sold = Gross Profit Minus Expenses = Net Profit.

Capital or Revenue?

Repairs to machinery

Page 12: Capital and Revenue Expenditure. How profit is calculated Revenue Minus Cost of Goods Sold = Gross Profit Minus Expenses = Net Profit.

Capital or Revenue?

Rent

Page 13: Capital and Revenue Expenditure. How profit is calculated Revenue Minus Cost of Goods Sold = Gross Profit Minus Expenses = Net Profit.

Capital or Revenue?

Extension of office block

Page 14: Capital and Revenue Expenditure. How profit is calculated Revenue Minus Cost of Goods Sold = Gross Profit Minus Expenses = Net Profit.

Capital or Revenue?

Electricity

Page 15: Capital and Revenue Expenditure. How profit is calculated Revenue Minus Cost of Goods Sold = Gross Profit Minus Expenses = Net Profit.

Capital or Revenue?

Buying new Machinery

Page 16: Capital and Revenue Expenditure. How profit is calculated Revenue Minus Cost of Goods Sold = Gross Profit Minus Expenses = Net Profit.

Capital or Revenue?

Adding Air Conditioning to a room

Page 17: Capital and Revenue Expenditure. How profit is calculated Revenue Minus Cost of Goods Sold = Gross Profit Minus Expenses = Net Profit.

Capital or Revenue?

Redecorating offices

Page 18: Capital and Revenue Expenditure. How profit is calculated Revenue Minus Cost of Goods Sold = Gross Profit Minus Expenses = Net Profit.

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

Page 19: Capital and Revenue Expenditure. How profit is calculated Revenue Minus Cost of Goods Sold = Gross Profit Minus Expenses = Net Profit.

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

Page 20: Capital and Revenue Expenditure. How profit is calculated Revenue Minus Cost of Goods Sold = Gross Profit Minus Expenses = Net Profit.