Week 5 – SS2 Second Term Financial Accounting Notes

 WEEK FIVE                 DATE: ______________
TOPIC: CAPITAL AND REVENUE EXPENDITURE

 CONTENT

• Definition of Capital and Revenue Expenditure
• Distinct between Capital and revenue expenditure
• Effects of Overstatement and Understatement of Capital and Revenue Eexpenditure
• Statement of Capital and Revenue Expenditure

1. Capital Expenditure: Capital expenditure are payment made on items of capital nature. They are expenses which add to the value of fixed assets. Capital expenditure therefore can simply be described as the expenditure that consist of cost of fixed assets and other associated costs.

   E.g:     (a) Cost of purchase     (b) Cost of delivery
           (c) Installation cost         (d) Legal costs of purchase
           (e) Architect fees.     (f) Cost of demolition before new building is sited
           (g) Cost of inspection and test of fixed asset before use.

2. Revenue Expenditure: Revenue expenditures are payments made on running the daily activities of business enterprises. They are expenses which do not add to the value of fixed assets but are for maintenance and repairs of fixed assets and to generally run the business on daily basis.
3. Eg:    (a) Cost of maintenance of fixed assets     (b) Cost of repairs

   (c) Payment of rents and rates (d) Payment of wages and salaries
   (e) Cost of transportation etc.     

Distinction between Capital and Revenue Expenditure

 CAPITAL EXPENDITURE                    REVENUE EXPENDITURE

    
EFFECTS OF OVERSTATEMENT AND UNDERSTATEMENT OF CAPITAL AND REVENUE EXPENDITURE.
Capital and revenue expenditure when wrongly posted or interpreted or wrongly mistaken for each other, will have a great effect of overstatement or understanding on profit.
Example
Capital expenditure overstated has the following effect

1. Overstatements of profit because revenue expenditure must have been understand.
2. Overstatement of value of fixed asset

 Revenue Expenditure understated has the following effects:

1. Understatement of profit
2. Understatement of value of fixed assets

 STATEMENTS OF CAPITAL AND REVENUE EXPENDITURE
These are prepared to show the distinction between them mostly in government office.
ILLUSTRATION
The Federal Ministry of Health incurred in 1989 the following:
                                        N
Construction of hospital ward                     28, 500, 000
Purchase of beds                              920, 000
Repairs of ambulances                         25, 000
Salaries and wages                             31, 000, 000
Maintenance of vehicles                          7, 500, 000
Purchases of petrol and lubricants                       800, 000
Purchase of theater equipment                     7, 920, 000
Construction of boreholes                          1, 200, 000
Purchases of drugs                              10, 550, 000
Purchases of vaccines                          1, 330, 000
Maintenance of mortuary buildings                  670, 000
Purchase of incubators                          3, 800, 000
Purchase of X-ray machines                      4, 200, 000

 Prepare statements of

1. Capital expenditure
2. Revenue expenditure

 Solution
Statement of Capital Expenditure
Particulars                                     N
Construction of hospital ward                     28, 500, 000
Purchase of beds                              920, 000
Purchase of theater equipment                     7, 920, 000
Construction of boreholes                          1, 200, 000
Purchase of incubators                          3, 800, 000
Purchase of X-ray machines                      4, 200, 000
                    Total                  46, 540, 000

 Statement of Revenue Expenditure
Particulars                                     N
Repairs pf ambulances                         25, 000
Salaries and wages                              31, 000, 000
Maintenance of vehicles                          7, 500, 000
Purchases of petrol and lubricants                       800, 000
Purchases of drugs                              10, 550, 000
Purchases of vaccines                          1, 330, 000
Maintenance of mortuary buildings                  670, 000
                    Total                  51, 875, 000

 Reading Assignment
Essentials Financial Accounting for S.S by A.O Longe page 186-192

 GENERAL EVALUATION QUESTIONS

1. State five reasons why organizations separate their operations into different departments
2. List six errors that will not affect the agreement of the trial balance
3. Explain four classifications of cost found in the preparation of manufacturing accounts
4. Explain the following (a) prime cost (b) work – in – progress (c) manufacturing profit
5. List five prime books of account used in recording financial transactions

 WEEKEND ASSIGNMENT

1. Purchase of lubricant oil is an example of (a) Revenue expenditure (b) Capital Expenditure (c) Accrued Expenses (d) Running cost
2. Purchase of Fixed Assets is an example of (a) running cost (b) accrued expenses (c) revenue expenditure (d) capital expenditure
3. Revenue expenditure can better be described as (a) recurrent expenses (b) ordinary expenses (c) general expenses (d) yearly expenses.
4. Revenue expenditure when understated has the following effects on the profit (a) understatement of profit (b) overstatement of profit (c) set profit of equilibrium to expenses (d) results in negative profit.
5. The followings are example of capital expenditure except _______ (a) cost of fixed assets ( b) installation cost of equipments (c) maintenance cost of assets (d) delivery cost of fixed assets

 THEORY

1. Define revenue expenditure and give ten example
2. What is capital expenditure? Give ten examples.