Expenditure and income can be categorized as shone below,
Capital expenditure is expenditure which results in the acquisition of fixed asset, or an important in their earning capacity.
- Capital expenditure is not charged as an expense in the profit and loss account, although a depreciation charge will usually be made to write off the capital expenditure gradually overtime.
- Capital expenditure on fixed asset results in the appearance of a fixed asset in the balance sheet of the business.
Revenue expenditure in which is incurred for either of the following reasons.
- For the purpose of the trade of the business.
- To maintain the existing earning capacity of fixed assets.
Capital income is the proceeds from the sale of non-trading asset. The profits or loss from the sale of fixed assets are included in the profit and loss account of a business, for the accounting period in which the sale takes place.
Revenue income is income derived from the following sources.
- The sale of trading asset.
- Interest and dividends received from investments held by business.
The categorization of capital and revenue items given above does not mentioned raising additional capital from the owners of the business or raising and repaying loans.
Revenue expenditure results from the purchase of goods and services that will
--Be used fully in the accounting period in which they are purchased, and so be a cost or expense in the trading profit and loss account.
--result in a current asset as at the end of the accounting period because the goods or services have not yet been consumed or made use of. The current asset would be shown in the balance sheet and is not yet a cost or expense in the trading, profit and loss account