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Easiest way to tell the difference between capital and revenue expenditure?

mr10mr10 Registered Posts: 26
I'm struggling here

Comments

  • AndrewGAndrewG MAAT, AAT Licensed Accountant Posts: 6
    One way of thinking about this is:

    Anything that the business buys that it is going to use for more than a year is capital expenditure (e.g. a van, new machinery)

    Anything that the business buys that it is going to use for less than a year is revenue expenditure (e.g. stock to sell, printer ink)

    In practice however, some things that would be classified as capital expenditure but were very cheap will actually be recorded as revenue expenditure (e.g. a wall clock or a hole punch).
    Different sized businesses will have different levels of capital expenditure that they will treat as revenue. So a small, sole trader might decide to treat only capital expenditure below £50 as revenue.
    A large, multinational might well treat any capital expenditure below £5,000 as revenue.
  • Pian32Pian32 Registered Posts: 215
    Just to add to the last paragraph above

    I think you'll have come across the materiality principle. Essentially if the amount wouldn't really impact the accounts it'll probably be treated as revenue. The small company that only makes £1,000 profit means £50 is 5% of that, so quite a difference. The large company that makes £100,000 profit it's now only 0.05% so barely effects the accounts.

    If you continue through the levels you'll learn why classification can be important but it'd be a lot to explain now.
    AAT Level 4, MAAT
    ACCA in progress
    F4- Passed Aug 2020
    F6- Sitting September 2020
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