UNIT- 4. ACCOUNTING PROCEDURES 4.1 Capital and Revenue Transactions (Expenditure & Receipts) Transactions REVENUE TRANSACTIONS -These transactions have a short term effect on the business CAPITAL TRANSACTIONS -These transactions have a long term effect on the business Capital receipts Revenue receipts Capital expenditure Revenue expenditure Capital profit Revenue Profit Capital loss Revenue Loss Why we should distinct these two revenue types? The distinction between these two transaction types is very important in ascertaining a business’s accurate Financial performance Which we find out through – Income Statement Income Expenses Financial position Which we find out through – Financial Position Statement Assets Capital Liabilities Capital Expenditure- CapEx Capital expenditures (CapEx) are funds used by a company to acquire, upgrade, and maintain physical assets such as property, plants, buildings, technology, or equipment. Capital expenditure is money spent by a business on purchasing non-current assets and improving or extending non-current assets. This is non-recurring (not occurring repeatedly) in nature. These are shown as non-current assets in the SOFP. This includes; All the legal costs incurred in the purchase of non-current assets. Cost of carriage for the delivery of non-current assets. Costs of installing non-current assets. Capital expenditure is recorded in statement of financial position Ex- Purchase of a motor vehicle – see the below illustration Purchase of the car $500,000 Total Cost of purchasing the car-(noncurrent asset) =$500,000+$75,000+$100,000+$125,000 = $ 800,000 Carriage of the car to office premises $75,000 Taxes on the car $125,000 Upgrading or installing the car $100,000 (not repairs) How these expenses appear in the Statement of Financial Position. Revenue Expenditure Revenue expenditure is money spent on running a business on a day-to-day basis. These are expenses incurred by a business as a result of producing its products and services. This is recurring (occurring repeatedly) in nature. These are shown as expenses in the Income statement. This includes; Administrative expenses Selling expenses Financial expenses Cost of maintaining and running non-current assets. (Ex- Depreciation of non-current assets, repairing charges) It also includes the cost of goods purchased for reselling purpose. Revenue expenditure is recorded in income statement Ex- Water bill paid, Electricity bill paid Administrative expenses are costs incurred to support the functioning of a business, but which are not directly related to the production of a specific product or service. Ex: Salaries & wages. Building rent. Utility Bill Payments Depreciation on non-current assets. Non-current asset repairs Insurance Office supplies.- cleaning supplies, stationary, Selling expenses; selling expenses are the costs associated with distributing, marketing and selling a product or service. Examples; Distribution costs such as logistics, shipping and insurance costs. Marketing costs such as advertising, website maintenance and s spending on social media Selling costs such as wages, commissions and out-of-pocket expenses. Financial & other expenses; Financial expenses are incurred when your company borrows money from creditors and lenders. These are hence those expenses that are outside of your company's core business line. For example, interest on money borrowed, loan origination fees. How these expenses appear in the Income statement Revenue - Sales (-) Sales returns Opening stock (+) Purchases (-) Purchase returns Stock available for sale (-) Closing Stock Cost of goods sold 5,000,000.00 (135,000.00) 4,865,000.00 670,000.00 2,300,000.00 (102,000.00) 2,198,000.00 2,868,000.00 (550,000.00) GROSS PROFIT 2,318,000.00 2,547,000.00 Administrative Expenses Salaries & wages. Building rent. Utility Bill Payments Depreciation on non-current assets. Non-current asset repairs Insurance Office supplies.- cleaning supplies, stationary, Selling Expenses 678,000.00 56,000.00 40,000.00 34,000.00 6,700.00 12,000.00 3,450.00 830,150.00 Revenue Expenditure shipping and insurance costs. advertising, website maintenance and s spending on social media wages for sales representatives 12,300.00 11,000.00 34,870.00 Financial & Other Expenses Bank loan interest Bank overdraft interests Other 60,000.00 7,600.00 9,500.00 58,170.00 (+) Othe incomes 77,100.00 1,581,580.00 55,000.00 Net profit 1,636,580.00 Capital Receipt A capital receipt occurs when money is received other than from normal trading activities. Means, incoming cash flows (receipts) originating from the sale of non-current assets, shares, or debt/ loans. This includes; The receipts of capital from the owner Examples 1. Owner Invested Cash to the business $ 200,000 Double Entry …………………………………………….. Dr. ……………………………………………..Cr. Receipts from loans Examples 1. Business Obtained a bank loan $ 700,000 Double Entry …………………………………………….. Dr. ……………………………………………..Cr. Sale proceeds of non-current assets Example 1. The business sold a motor vehicle for 1,200,000 Double Entry …………………………………………….. Dr. ……………………………………………..Cr. Capital receipt is recorded in statement of financial position Profit for sale proceeds of non-current assetsUnder income statement. Revenue Receipts A revenue receipt is money received by a business from normal trading activities. These refer to those receipts that neither reduce the assets of the organization nor create any liability on the government. Usually, these receipts are recurring in nature, and affect the profit and loss of any business. These activities include; 1. Revenue from sale of goods A book store A textile shop A supermarket shop A computer shop ; Sale of books for cash and on credit ; Sale of clothes for cash and on credit ; Sale of different groceries for cash and on credit : Sale of computers and accessories for cash and on credit 2. Fees from clients / cash received from providing services A lawyer for providing consultation to a customer ; Client fees A doctor for his consultation : Payment from a patient Teacher for the knowledge : Fees from students 3. Other income such as rent received, commission received, discount received and etc. Revenue receipt is recorded in income statement. Ex- Discount received, Rent received Other Income Rent receivables Interest receivables Commission receivables Discount receivables Question 01 Classify following transactions as capital receipt, capital expenses, revenue receipts or revenue expenses. i. ii. iii. iv. v. vi. vii. viii. ix. x. xi. xii. Rent received Electricity paid Bank loan obtained Capital invested by owner Purchased inventory for reselling Purchased Office fixtures Maintenance charges of Air conditioner Proceeds of sale of Computer Profit gained by selling computer Installation cost of Air conditioner Legal charges for acquiring new premises for office Dividends received Question 02 Transaction Revenue expenditure Revenue receipt Capital Expenditure Capital receipt Revenue expenditure Revenue receipt Capital Expenditure Capital receipt Purchased fuel for motor vehicle Paid for delivery of new motor vehicle Charge customers for hire of motor vehicles Banked proceeds from sale of an old motor vehicles on scrap value Question 03 Transaction Proceeds of sale of motor vehicles Purchase of motor vehicles Insurance for motor vehicles Question 04 Transaction Revenue expenditure Revenue receipt Capital Expenditure Capital receipt Sale of motor van Purchased new motor van tires Cash discount received Purchased a new motor van Question 05 Ajib also incurred the following expenditure. 1. 2. 3. 4. Delivery of motor van from manufacturer Fuel for motor van Signwriting his business name on the motor van Motor van insurance Required: State whether each of the items above is capital expenditure or revenue expenditure. Calculation of capital and revenue transactions A business has provided the following information for a particular month. $ Purchased goods for cash Purchased goods on credit Bought a computer Repairs to furniture Required; a) Calculate capital expenditure b) Calculate revenue expenditure 10 000 7 500 15 000 2 500