Friday, 3 February 2012

Revenue and Capital Items

Definition and Explanation of Revenue Expenditures
Revenue expenditures are expenses which are incurred in the day to day conduct and administration of business and the effect which is completely exhausted within the current accounting year. These expenditures are recurrent by nature i.e. which are incurred for meeting day to day requirement of a business and the effect of these expenditures is always short-lived, they are
also known as “expenses or expired costs” e.g. purchase of goods, salaries paid, postages, rent, traveling expenses, stationery purchased, wages paid on goods purchased e.t.c. These expenditures is incurred on items or services which are useful to the business but are used up in less than one year and therefore, only temporarily increase the profit-making capacity of the business.
The following are the examples of revenue expenditure:
1.   Wages paid to factory workers
2.   Oil to lubricate machines
3.   Services charges to motor vehicle and petrol
4.   Bad debts
5.   Freight, cartage, transportation, insurance paid on saleable goods
6.   Interest on borrowed money
7.   Rent, carriage on goods, postage, advertisement.

Capital Expenditures
An expenditure which results in the acquisition of permanent assets which is intended to be permanently used in the business for the purpose of earning revenue is known as capital expenditure. These expenditures are non-recurring by nature. Assets acquired by incurring these expenditures are utilized by the business for a long time and thereby they earn revenue.
NOTE: They are not expenditures for one accounting period. Machinery has long life and its benefits will be enjoyed over a long period of time. It should be remembered that when as asset is purchased, all amounts spend up to the point till the asset is ready for use should be treated as capital expenditures.

The following are examples of capital expenditures:
1.   Purchase of furniture, motor vehicle, electric motors, office equipment, loose tools and other tangible assets.
2.   Cost of acquiring intangible asset like goodwill, patient, copyrights, trademarks, patterns and design e.t.c.
3.   Addition or extension of assets.
4.   Money spent on installation and erection of building.
5.   Cost of issue of shares and debentures (certain expenses incurred when shares are issued)
6.   Legal expenses on raising loans for the purchase of fixed assets.
7.   Interest on loans and capital during construction period.
8.   Premium given for a lease.
9.   Cost of replacing factory building from an old place to a new and better site.

Example
Mr. James Okoro started business on 1st April 2002 with the sum of N800,000.00 which he paid into a bank account. In the 1st 3 months of the trading year ended 30th June 2002, the following transactions took place.
     I.        The sum of N100,000.00 was borrowed from the co-operative society on a long term mortgage, the money was paid into the bank.
   II.        Freehold premises costing N1.06M where bought by cheque.
 III.        Purchase of stock in trade where made on credit, amounting to N696,000.00
 IV.        Credit sales where N710,000.00
   V.        Payment by cheque where as follows:
Furniture & fittings-----------------N90,000.00
Rates&Insurance------------------N28,000.00Premises----------------------------N9,000.00
N656,000.00
 
Salaries-----------------------------N29,000.00          
Private Expenditures---------------N60,000.00
Trade Creditors--------------------N440,000.00 
 VI.        Receives from pay debtors paid into the bank were N624,000.00

Questions
1.   You are required to calculate the amount on James Okoro capital expenditure.
2.   Revenue expenditures from the quarter ended 2002

JAMES OKORO
Computation of capital expenditures
Freehold premises---------------------------------------N1,600,000.00
Furniture & fittings--------------------------------------       90,000.00
Alteration to premises-----------------------------------         9,000.00
                                                                       N1,699,000.00

Computation Of revenue expenditure
Stock on trade-----------------------------------------N696,000.00
Rate & Insurance--------------------------------------  28,000.00
Salaries------------------------------------------------      29,000.00
Private expenses--------------------------------------      60,000.00
                                                                       N813,000.00

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