Candidates that attempted this question on distinction between capital expenditure and revenue expenditure, reasons for differentiating capital expenditure from revenue expenditure and classification of transactions into either capital expenditure or revenue expenditure performed well.

Valuable marks were gained in this question as the performance of candidates in this question was quite impressive.

Below are some of the suggested responses:

(a)Distinction between Capital Expenditure and Revenue Expenditure

        Capital expenditure is:
-           the expenditure incurred in order to acquire or improve fixed assets for the purpose of earning income or increasing the revenue earning capacity of a business;
-           the acquisition cost of fixed assets which includes cost of delivery, installation, initial testing and legal services.                                                                  
while:
Revenue expenditure is expenditure incurred:
-           for the purpose of running the day-to-day activities of a business;
-           in the normal course of the business and is expensed entirely in the year in which it arises.                                               

(b) Reasons for differentiating capital expenditure from revenue expenditure:
The difference is made in order to:

1. ascertain the correct profit or loss of the business in a particular year.
2. avoid understating and overstating of the cost of fixed assets.
3. properly classify assets into non-current assets and current assets in the Balance Sheet.
4. comply with statutory requirements.
5. comply with accounting practices/conventions.
6. ensure correct determination of tax payable.
7. properly classify items that should be recorded in the Profit and Loss Account.

4(c) Classification of transactions into Capital Expenditure and Revenue Expenditure:

1. Legal expenses incurred in collection of debts          - Revenue expenditure
2. Wages paid to workmen for the installation of plant  -  Capital expenditure
3. Purchase of company’s electrical signpost                 -  Capital expenditure
4. Payment for stationery                                                -   Revenue expenditure
5. Payments for lubricants in running the company’s manufacturing plant

                                                                                                -   Revenue expenditure

1. Acquisition of plant and machinery                            -   Capital expenditure
2. Legal fees paid on acquisition of premises                 -    Capital expenditure