Capital vs Revenue expenditure

Richard08

Hi Everyone,

I can never get my head round the difference between the two. Is there good definition you use for these that works well very well with most items.

I have listed some expenditure below please let me know whether you think it's revenue or capital expenditure:

1) Flooring
2) Alarms
3) Fire Protection
4) Heating service
5) Solicitor legal fee for Lease hold
6) Plumbing costs
7) Glass and Glazing

Sorry, i listed so many. but if yu can help with any i would really appreciate it.

Thank you

Richard

NeilH

Hi

Unfortunately it isn't necessarily the case that certain items are automatically capital expenses and others are revenue expense. It can also depend on the extent/value or the context of the spend.

For example you mention flooring. A brand new floor refurbishment to a building could be considered capital. However, repairs or replacement to part of a floor could be considered an expense. Solicitor's fees in relation to a lease hold are often capitalised to be written off over the period of the lease. However, a small fee relating to (for example) an amendment to the lease may be considered an expenses. Also, most organisations will have a capitalisation policy for expenditure above a certain amount.

Can you be a bit more specific with your examples? Any particular reason you need to know?

Neil

Richard08

Thanks for your reply. I just wanted to get a good grasp of this concept. I find the concept quite difficult to understand. I need to know this as i have taken on responsibilty of looking after the fixed asset register in the company i work for.

by definition capital expenditure is expenditure incurred when you improve an asset.
Taking the flooring example new flooring is ofcourse improving the asset and therefore by this definition it is capital exp. But you can also argue that new flooring is replacing the old therefore this is not an improvement but merely returning the asset back to its previous condition so therefore as it is a repair it is revenue expenditure.

This is why i find it difficult to understand.

Thanks once again for your help.

Richard

Richard08

Hi,

I have given further details on each expenditure

1) Flooring - Laminate flooring Cost £3k
2) Alarms
3) Fire Protection - fire risk assesment total cost over £2K
4) Heating service - service gas boiler
5) Solicitor legal fee for Lease hold
6) Plumbing costs - repair faulty taps & clear blocked drains
7) Glass and Glazing - Glazing repair


Thanks

Richard

NeilH

Richard08 wrote: »

Hi,

I have given further details on each expenditure

1) Flooring - Laminate flooring Cost £3kI would consider this by it's nature (fixture/fitting, perhaps an improvement to lease hold) and it's value as a capital item
2) Alarmsassuming this is a brand new and complete intruder alarm (extensive in nature a probably cost) it would be capital
3) Fire Protection - fire risk assessment total cost over £2Kagain it's extensive nature and cost would suggest capital, however in my work I’ve usually not seen this capitalised rather it would be prepaid over an appropriate period such as a financial year or until another assessment is due - anyone have other thoughts on this?
4) Heating service - service gas boilerbasic repairs to items that are themselves capital items are usually considered a revenue expense
5) Solicitor legal fee for Lease holdprofessional and other fees incurred as part of bringing a capital item to "existence" can usually be capitalised, often as part of the capital item's total cost
6) Plumbing costs - repair faulty taps & clear blocked drainssame as the boiler
7) Glass and Glazing - Glazing repairsame as the boiler and plumbing


Thanks

Richard

Hi, Answers in blue...

Richard08

Hi

Thank you so much for your help with this. I can honestly say it this has helped me a great deal and has improved my understanding of this concept.

Regarding your comments on number 3) you mention that the fire risk cost is prepaid over an appropriate period such as a financial year or until another assessment is due. Does this mean that this cost is being treated as a prepayment. So when the payment goes out from the bank you Cr - bank and Dr - prepayment. Then over the period the risk assesment covers you release from prepayments to the P/L. So you Cr-Prepayment and Dr-P/L account such as health and safety account each month?

Further note on number 2) the alarm cost is below £100.00.

Thank you so much

Richard

NeilH

Hi

You're correct on the prepayment treatment, though remember it may go through the purchase ledger rather than direct to the bank.

On the issue of the alarm, I would treat this as a revenue expense.

It is worth remebering that each situation should be judged on it's own circumstances and inline with any company policy and financial reporting regulations.

Neil