CAPITAL AND REVENUE EXPENDITURE

SECOND TERM SCHEME OF WORK FOR SS 2 FINANCIAL ACCOUNTING LESSON NOTE

SCHEME OF WORK WITH WEEKLY LESSON NOTES FOR SS 2 SECOND TERM FINANCIAL ACCOUNTING

SUBJECT :

FINANCIAL ACCOUNTING

CLASS :

SS 2

TOPIC :

CAPITAL AND REVENUE EXPENDITURE 

Objectives:

• To define capital and revenue expenditure.
• To differentiate between capital and revenue expenditure.
• To understand the effects of overstating and understating capital and revenue expenditure.

Materials:

• Whiteboard or projector
• Markers or presentation software
• Handouts or worksheets
• Case studies or scenarios

WEEK  :

WEEK 11

PREVIOUS LESSON :

MANUFACTURING ACCOUNTS

CONTENT

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

Definition of Capital and Revenue Expenditure

Capital and revenue expenditures are two types of expenses that a company incurs in order to generate income. The main difference between the two is that capital expenditures are for long-term investments in fixed assets that will provide future benefits, while revenue expenditures are for short-term expenses that are incurred to maintain the day-to-day operations of the business.

Capital Expenditures:

Capital expenditures are the expenses incurred by a business to acquire or upgrade long-term assets such as buildings, machinery, equipment, or vehicles. Capital expenditures are generally made to improve the business’s productive capacity or to extend its useful life. These expenses are expected to provide future economic benefits to the business beyond the current accounting period. Examples of capital expenditures include:

• Purchasing a new building or land for expansion
• Upgrading machinery or equipment
• Acquiring a patent or copyright
• Purchasing a vehicle for business use

Capital expenditures are typically recorded on the balance sheet as assets and are depreciated over time. The cost of the asset is spread out over its useful life, and a portion of the cost is expensed each year in the form of depreciation.

Revenue Expenditures:

Revenue expenditures are the expenses incurred by a business that are necessary to maintain the day-to-day operations of the business. These expenses are typically short-term and are not expected to provide future economic benefits beyond the current accounting period. Examples of revenue expenditures include:

• Rent or lease payments
• Salaries and wages for employees
• Utility bills
• Repairs and maintenance of equipment

Revenue expenditures are typically recorded on the income statement as expenses and are deducted from revenues to calculate net income

Evaluation

1. Which of the following is an example of capital expenditure? a) Purchase of office supplies b) Payment of salaries c) Purchase of land d) Advertising expenses
2. Which of the following is an example of revenue expenditure? a) Purchase of machinery b) Payment of rent c) Purchase of inventory d) Payment of income tax
3. Which type of expenditure is incurred for acquiring fixed assets? a) Capital expenditure b) Revenue expenditure c) Both d) None
4. Which type of expenditure is considered as a one-time expense? a) Capital expenditure b) Revenue expenditure c) Both d) None
5. Which type of expenditure results in long-term benefits for the organization? a) Capital expenditure b) Revenue expenditure c) Both d) None
6. Which type of expenditure is essential for day-to-day business operations? a) Capital expenditure b) Revenue expenditure c) Both d) None
7. Which type of expenditure is considered as an investment for the organization? a) Capital expenditure b) Revenue expenditure c) Both d) None
8. Which type of expenditure is recorded as an asset in the balance sheet? a) Capital expenditure b) Revenue expenditure c) Both d) None
9. Which type of expenditure is recorded as an expense in the income statement? a) Capital expenditure b) Revenue expenditure c) Both d) None
10. Which type of expenditure is incurred to improve the efficiency of the organization? a) Capital expenditure b) Revenue expenditure c) Both d) None

Some examples of items that can be listed as capital and revenue expenditures:

Capital Expenditure:

1. Land and buildings: The purchase or construction of land and buildings are considered capital expenditures as they provide future economic benefits to the business.
2. Equipment and machinery: The acquisition of equipment and machinery that has a long useful life is considered a capital expenditure.
3. Vehicles: Purchasing a vehicle for business use can be classified as a capital expenditure if it has a long useful life and is intended for productive use in the business.
4. Computer hardware and software: Purchasing new computers and software is considered a capital expenditure if it is intended to improve the business’s productive capacity.
5. Furniture and fixtures: The purchase of furniture and fixtures for a business can be classified as a capital expenditure if it has a long useful life and is intended to improve the productive capacity of the business.

Revenue Expenditure:

1. Rent or lease payments: The cost of renting or leasing a property or equipment is considered a revenue expenditure.
2. Salaries and wages for employees: The cost of paying employees for their work is considered a revenue expenditure as it is necessary to maintain the day-to-day operations of the business.
3. Utility bills: The cost of utilities such as electricity, gas, and water is considered a revenue expenditure.
4. Repairs and maintenance of equipment: The cost of repairing and maintaining equipment to keep it in good working order is considered a revenue expenditure.
5. Advertising and marketing expenses: The cost of promoting a business’s products or services through advertising and marketing campaigns is considered a revenue expenditure

Distinction between capital and revenue expenditures

Distinction between capital and revenue expenditures is important because it affects how the expenses are recorded and reported on a company’s financial statements. The main differences between capital and revenue expenditures are:

1. Nature of Expenses: Capital expenditures are incurred for long-term investments in assets that will provide benefits beyond the current accounting period, while revenue expenditures are incurred for short-term expenses that are necessary to maintain the day-to-day operations of the business.
2. Treatment on Financial Statements: Capital expenditures are recorded on the balance sheet as assets and are depreciated over time, while revenue expenditures are recorded on the income statement as expenses and are deducted from revenues to calculate net income.
3. Useful Life: Capital expenditures are expected to have a useful life of more than one accounting period, while revenue expenditures are expected to be consumed within the current accounting period.
4. Impact on Profitability: Capital expenditures do not directly impact the current period’s profitability but may impact future profitability by increasing the business’s productive capacity or extending the useful life of assets. Revenue expenditures, on the other hand, directly impact the current period’s profitability.
5. Legal Compliance: Capital expenditures may require compliance with legal requirements such as building codes, environmental regulations, or safety standards, while revenue expenditures may not be subject to such requirements.

Capital expenditures are long-term investments in assets that provide future economic benefits, while revenue expenditures are short-term expenses that are necessary to maintain the day-to-day operations of the business. The distinction between the two types of expenses is important for financial reporting and decision-making purposes.

Evaluation

1. Which of the following is a characteristic of capital expenditure? a) It is recurring in nature b) It is incurred for the day-to-day operations of the business c) It results in long-term benefits for the organization d) It is recorded as an expense in the income statement
2. Which of the following is a characteristic of revenue expenditure? a) It results in long-term benefits for the organization b) It is incurred for the acquisition of fixed assets c) It is recorded as an asset in the balance sheet d) It is recurring in nature
3. Which of the following is an example of capital expenditure? a) Payment of rent b) Purchase of office supplies c) Purchase of machinery d) Payment of salaries
4. Which of the following is an example of revenue expenditure? a) Purchase of land b) Payment of income tax c) Payment of dividends d) Payment of interest on a loan
5. Which type of expenditure is considered as an investment in the organization? a) Capital expenditure b) Revenue expenditure c) Both d) None
6. Which type of expenditure is considered as a one-time expense? a) Capital expenditure b) Revenue expenditure c) Both d) None
7. Which type of expenditure is essential for day-to-day business operations? a) Capital expenditure b) Revenue expenditure c) Both d) None
8. Which type of expenditure is recorded as an asset in the balance sheet? a) Capital expenditure b) Revenue expenditure c) Both d) None
9. Which type of expenditure is recorded as an expense in the income statement? a) Capital expenditure b) Revenue expenditure c) Both d) None
10. Which type of expenditure results in short-term benefits for the organization? a) Capital expenditure b) Revenue expenditure c) Both d) None

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. 

Overstatement or understatement of capital and revenue expenditure can have significant impacts on a company’s financial statements and financial performance. Here are the effects of overstatement and understatement of capital and revenue expenditure:

Overstatement of Capital Expenditure:

If a company overstates its capital expenditures, it can lead to an inflated value of assets on the balance sheet. This can result in a higher depreciation expense, which reduces net income and may result in an overstatement of the company’s profitability. Overstating capital expenditure can also result in a lower return on assets (ROA) ratio, which is a measure of a company’s efficiency in using its assets to generate profits. In addition, overstating capital expenditure may lead to an overvaluation of the company’s stock and may result in investors paying a premium for shares.

Understatement of Capital Expenditure:

If a company understates its capital expenditures, it can lead to an understatement of the company’s assets on the balance sheet. This can result in a lower depreciation expense, which increases net income and may result in an overstatement of the company’s profitability. Understating capital expenditure can also result in a higher return on assets (ROA) ratio, which may give a misleading impression of the company’s efficiency in using its assets to generate profits. In addition, understating capital expenditure may lead to an undervaluation of the company’s stock and may result in investors paying less for shares

Overstatement of Revenue Expenditure:

If a company overstates its revenue expenditures, it can lead to an understatement of net income on the income statement. This may result in a lower valuation of the company’s stock and may discourage investors from buying shares. Overstating revenue expenditure can also lead to a higher tax liability, as the company may be claiming more expenses than it is entitled to.

Understatement of Revenue Expenditure:

If a company understates its revenue expenditures, it can lead to an overstatement of net income on the income statement. This may result in an inflated value of the company’s stock and may attract investors who are willing to pay a premium for shares. However, this can be misleading as the company may not be accurately reflecting its true financial performance. Understating revenue expenditure can also lead to a lower tax liability, as the company may be paying less tax than it is required to.

Overstatement or understatement of capital and revenue expenditure can have significant effects on a company’s financial statements and financial performance. Companies should ensure that their financial statements accurately reflect their true financial position and performance to ensure transparency and maintain the trust of investors and stakeholders

STATEMENTS OF CAPITAL AND REVENUE EXPENDITURE

Statements of capital and revenue expenditure are financial statements that show the company’s spending on capital and revenue items during a specific period. Here’s a brief overview of these statements:

Statement of Capital Expenditure:

A statement of capital expenditure provides information on the company’s spending on long-term assets during a specific period. It shows the amounts spent on acquiring or upgrading fixed assets such as property, plant, and equipment, and intangible assets such as patents or copyrights. This statement is typically prepared by the accounting department and shows the details of each capital expenditure, such as the date of acquisition, the cost, and the useful life of the asset. The total amount of capital expenditure is usually included in the company’s cash flow statement.

Statement of Revenue Expenditure:

A statement of revenue expenditure provides information on the company’s spending on day-to-day operational expenses during a specific period. It shows the amounts spent on expenses such as rent, utilities, salaries and wages, and marketing expenses. This statement is typically prepared by the accounting department and shows the details of each revenue expenditure, such as the date of the expense, the cost, and the purpose of the expense. The total amount of revenue expenditure is usually included in the company’s income statement.

Both statements are important for analyzing a company’s financial performance and determining its financial position. By examining the details of the capital expenditure statement, investors and stakeholders can assess the company’s investment in long-term assets and its plans for future growth. Similarly, the revenue expenditure statement provides insights into the company’s operational costs and can help identify areas where cost-cutting measures may be necessary

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
Capital expenditure
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

Capital Expenditure:

Construction of hospital ward: Debit: Property, Plant, and Equipment Account 28,500,000 Credit: Bank Account 28,500,000

Purchase of beds: Debit: Property, Plant, and Equipment Account 920,000 Credit: Bank Account 920,000

Purchase of theater equipment: Debit: Property, Plant, and Equipment Account 7,920,000 Credit: Bank Account 7,920,000

Construction of boreholes: Debit: Property, Plant, and Equipment Account 1,200,000 Credit: Bank Account 1,200,000

Purchase of incubators: Debit: Property, Plant, and Equipment Account 3,800,000 Credit: Bank Account 3,800,000

Purchase of X-ray machines: Debit: Property, Plant, and Equipment Account 4,200,000 Credit: Bank Account 4,200,000

Revenue Expenditure:

Repairs of ambulances: Debit: Repairs and Maintenance Account 25,000 Credit: Bank Account 25,000

Salaries and wages: Debit: Salaries and Wages Account 31,000,000 Credit: Bank Account 31,000,000

Maintenance of vehicles: Debit: Repairs and Maintenance Account 7,500,000 Credit: Bank Account 7,500,000

Purchase of petrol and lubricants: Debit: Consumables Account 800,000 Credit: Bank Account 800,000

Purchase of drugs: Debit: Consumables Account 10,550,000 Credit: Bank Account 10,550,000

Purchase of vaccines: Debit: Consumables Account 1,330,000 Credit: Bank Account 1,330,000

Maintenance of mortuary buildings: Debit: Repairs and Maintenance Account 670,000 Credit: Bank Account 670,000

Note: The accounts used in the above double entries are examples and may not reflect the actual accounts used by the Federal Ministry of Health

Double entries for the given transactions:

Note: The debit and credit columns are interchangeable, as long as the total debits equal the total credits.

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.
3. What is the effect of overstating revenue expenditure? a) Overstating net income b) Understating net income c) No effect on net income d) None of the above
4. What is the effect of understating capital expenditure? a) Overstating net income b) Understating net income c) No effect on net income d) None of the above
5. What is the effect of overstating capital expenditure? a) Overstating net income b) Understating net income c) No effect on net income d) None of the above
6. What is the effect of understating revenue expenditure? a) Overstating net income b) Understating net income c) No effect on net income d) None of the above
7. What is the effect of overstating revenue expenditure on taxes? a) Higher taxes b) Lower taxes c) No effect on taxes d) None of the above
8. What is the effect of understating capital expenditure on taxes? a) Higher taxes b) Lower taxes c) No effect on taxes d) None of the above
9. What is the effect of overstating capital expenditure on taxes? a) Higher taxes b) Lower taxes c) No effect on taxes d) None of the above
10. What is the effect of understating revenue expenditure on taxes? a) Higher taxes b) Lower taxes c) No effect on taxes d) None of the above
11. Which financial statement is affected by the overstatement of revenue expenditure? a) Balance sheet b) Income statement c) Statement of cash flows d) None of the above
12. Which financial statement is affected by the understatement of capital expenditure? a) Balance sheet b) Income statement c) Statement of cash flows d) None of the above

Lesson Presentation :

Procedure:

1. Introduction: Start the lesson by introducing the topic and its objectives.
2. Definitions: Explain the definitions of capital and revenue expenditure and provide examples of each.
3. Differences: Discuss the differences between capital and revenue expenditure, including their nature, purpose, benefits, and treatment in financial statements.
4. Effects of Overstating and Understating: Explain the effects of overstating and understating capital and revenue expenditure on financial statements, taxes, and performance analysis.
5. Case Studies or Scenarios: Provide real-world case studies or scenarios to help students understand the application of capital and revenue expenditure concepts in practical situations.
6. Worksheets: Provide handouts or worksheets for students to practice differentiating between capital and revenue expenditure and calculating their effects on financial statements.
7. Review: Conclude the lesson by reviewing the main points and answering any questions students may have.

Assessment: To assess student learning, use the following methods:

• Assign homework that requires students to differentiate between capital and revenue expenditure and calculate their effects on financial statements.
• Conduct a quiz or exam that tests students’ knowledge and understanding of the topic.
• Observe students’ participation and engagement during class discussions and activities.

Conclusion: By the end of the lesson, students should be able to differentiate between capital and revenue expenditure, understand their effects on financial statements, and apply these concepts to practical situations.

Weekly Assessment /Test

1. What is an example of capital expenditure? a) Paying for snacks b) Buying a school building c) Purchasing pencils d) Renting a classroom
2. What is an example of revenue expenditure? a) Paying for a new playground b) Buying a new computer for the library c) Paying for field trips d) Purchasing new uniforms
3. Which type of expenditure is considered a long-term investment for a business? a) Capital expenditure b) Revenue expenditure c) Both d) Neither
4. Which type of expenditure is considered a day-to-day expense for a business? a) Capital expenditure b) Revenue expenditure c) Both d) Neither
5. What is the difference between capital and revenue expenditure? a) Capital expenditure is for long-term investment, while revenue expenditure is for day-to-day expenses. b) Revenue expenditure is for long-term investment, while capital expenditure is for day-to-day expenses. c) Capital expenditure is for fun activities, while revenue expenditure is for learning activities. d) Revenue expenditure is for fun activities, while capital expenditure is for learning activities
6. What happens if we overstate revenue expenditure? a) It increases net income b) It decreases net income c) It has no effect on net income d) It decreases taxes
7. What happens if we overstate capital expenditure? a) It increases net income b) It decreases net income c) It has no effect on net income d) It increases taxes
8. What happens if we understate revenue expenditure? a) It increases net income b) It decreases net income c) It has no effect on net income d) It increases taxes
9. What happens if we understate capital expenditure? a) It increases net income b) It decreases net income c) It has no effect on net income d) It decreases taxes
10. Which financial statement is affected by capital and revenue expenditure? a) Balance sheet b) Income statement c) Statement of cash flows d) All of the above