3 Accounts and finance

Table of Contents

1. Topic pack - Accounts and finance - introduction
2. 3.1 Sources of finance - notes
3. 3.1 Sources of finance - questions
4. 3.2 Investment appraisal - notes
5. Investment appraisal
6. 3.2 Investment appraisal - questions
7. 3.3 Working capital - notes
8. 3.3 Working capital - questions
9. 3.4 Budgeting - notes (HL only)
10. 3.4 Budgeting - questions
11. 3.5 Final accounts - notes
    1. Final accounts
    2. Financial accounts
    3. Sample accounts
    4. Capital and revenue expenditure
    5. Trading and profit and loss accounts
    6. Profit and loss account - interactive graphic
    7. Balance sheets
    8. Balance sheet - interactive graphic
    9. Uses and limitations of published accounts
    10. Depreciation
    11. Terminal value
    12. Revaluation
    13. Intangible assets
    14. Dyson lose patent case
    15. Stock (inventory) valuation
12. 3.5 Final accounts - questions
13. 3.5 Final accounts - simulations and activities
14. 3.6 Ratio analysis - notes
15. 3.6 Ratio analysis - questions
16. 3.6 Ratio analysis - simulations and activities
17. Printable version

Capital and revenue expenditure - Recap for P$L

When drawing up the profit and loss account and balance sheet, it is important to remember the difference between capital and revenue expenditure. Firms raise capital from shareholders and other sources and this is spent on buying premises, plant and equipment etc. The finance raised and the corresponding capital expenditure are recorded in the balance sheet. Other spending takes place on current assets used directly in the production of finished goods, such as raw materials, packing materials and stocks of spare parts. This is called revenue expenditure.

Unfortunately, there are some crossovers between the profit and loss account and the balance sheet which we will examine during this section. The exceptions are shown in italics in the following definitions:

• Capital expenditure - the spending of funds to buy fixed assets with a long life, such as land or buildings. This spending is recorded in the balance sheet, although the depreciation of these assets is included in the profit and loss account as an expense.
• Revenue expenditure - the use of funds to buy current assets, such as stocks, or to pay operating expenses such as salaries and wages. These are recorded in the profit and loss account. However, stocks that remain at the end of the company year are recorded in the balance sheet, because they are assets that can be sold by the business in the next financial year.