Observation

Few candidates attempted this question which was on capital and revenue expenditure. The candidates had little or no idea on this topic and could not differentiate them correctly. Those who attempted the question failed. 

The expected answer include:

(a)(i) Capital expenditure results in acquisition of permanent assets in a business, while revenue expenditure refers to expenses incurred in the day to day activities of a business.

(ii) Capital expenditure is incurred to improve, extend or renew existing assets while revenue expenditure is incurred to maintain, service or repair fixed assets.

(iii)The benefit from capital expenditure is expected to last for more than one accounting period while the benefit of revenue expenditure is to be enjoyed in the current accounting period.

(iv) Capital expenditure is recorded in the Balance Sheet while revenue expenditure is recorded in the Trading, Profit and Loss Account.

(v)Capital expenditure items are recorded as real accounts while revenue expenditure is recorded in the Trading, Profit and Loss Account.

(b)(i) If capital expenditure is treated as revenue expenditure, net profit will be understated or net loss will be overstated.

(ii) If revenue expenditure is treaded as capital expenditure, net profit will be overstated or net loss will be understated.

(iii) If capital expenditure is treated as revenue expenditure, fixed assets will be understated.
(iv)  If revenue expenditure is treated as revenue, fixed assets will be understated.

(v) It is important to separate capital and revenue expenditure in order to correctly match cost to the revenue in the period in which benefits will be enjoyed.

(c) (i) If an expenditure is incurred on any item meant for use beyond one accounting year, it is presumed to be a capital expenditure.

(ii) If the expenditure is incurred on items used up within one accounting year, it is regarded as revenue expenditure.

(iii) The type of business also dictates what is capital or revenue expenditure.