CAPITAL AND REVENUE EXPENDITURE & INCOME

CAPITAL EXPENDITURE
• Expenditure incurred on the acquisition of a non-current asset or to improve the
performance of the asset. It has no effect on profits but increases the value of non-
current assets in the statement of financial position (balance sheet).
• Accounting entries:
DEBIT Non-current asset account
CREDIT Cash book / Supplier account
• Examples:
1. Purchase of office equipment.
2. Customs duty paid on imported delivery vehicles.
3. Wages paid on the construction of factory building.
4. Installation of air conditioner in office building.
5. Extension of showroom building.
6. Painting of building for the first time.
7. Legal charges paid to acquire land.
8. Costs of cleaning, cutting and levelling land for construction of building.

REVENUE EXPENDITURE
• Expenditure incurred for the purpose of trade and any other expenditure to maintain
non-current assets under their existing working conditions. It affects the profits of the
enterprise, but has no effect on the value of non-current assets.
• Accounting entries:
DEBIT Expense account (or Statement of Profit or Loss)
CREDIT Cash book / Supplier account
• Examples:
1. Purchase of goods for re-sale.
2. Purchase of packing materials.
3. Payment of business running expenses (electricity, telephone, rent etc.)
4. Wages and salaries of office employees.
5. Repairs and maintenance of motor vehicles.
6. Annual insurance paid on delivery vans.
7. Replacement of tyres every 15,000 kilometres.
8. Depreciation of office equipment.
9. Re-painting of office building.

CAPITAL INCOME
• Capital income refers to profit from sale of an asset other than a current asset, e.g.
profit on disposal of a non-current asset – also known as ‘capital profit’. Such an
income is recognized as a gain to profit or loss.
• However, a capital receipt is a receipt of money from the sale of an asset other than a
current asset (e.g. a non-current asset).

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REVENUE INCOME
• Revenue income is income derived from the sale of trading assets (such as goods), as
well as income from investments held by the business (e.g. interest & dividend income
from quoted investments). Such an income is recognized as a gain to profit or loss.
• A revenue receipt is a receipt of income produced by an asset (e.g. receipt from sale of
goods, receipt of interest and dividends from investments held by the business etc.).

ACCOUNTING FOR NON-CURRENT ASSETS, DEPRECIATION & DISPOSALS

• Purchase of a non-current asset (e.g. motor van):
DEBIT Motor van account (at cost)
CREDIT Cash book / Supplier account
• Depreciation charge for an accounting period:
DEBIT Depreciation expense (or Statement of Profit or Loss)
CREDIT Accumulated Depreciation account
• Disposal of a motor van costing $X for $Y:
1. To record the cost price $X:
DEBIT Disposal account
CREDIT Motor van account (at cost)
2. To record the resale value $Y:
DEBIT Cash book / Receivable account
CREDIT Disposal account
3. Transfer of total accumulated depreciation charges on the asset being disposed of:
DEBIT Accumulated Depreciation account
CREDIT Disposal account
4. Closing the Disposal Account:
If Dr>Cr, difference on the credit side is a “loss on disposal”, an expense in the
Statement of Profit or Loss.
If Cr>Dr, difference on the debit side is a “profit on disposal”, a revenue in the
Statement of Profit or Loss.

PART-EXCHANGE TRANSACTIONS
• Example:
Purchased a new motor van costing $3,000 in part-exchange of an old van costing
$2,000 with a trade-in value of $1,200. The difference was paid in full in cash.
• Cost of new van = $3,000
Cost of old van exchanged = $2,000
Resale value of old van = $1,200 (Trade-in value, i.e. part-exchange allowance)
Hence, difference paid in cash for new van = $(3,000 – 1,200) = $1,800
• Accounting entries:
1. To record acquisition of new van:
DEBIT Motor van account (at cost) $3,000 (Cost of new van)
CREDIT Disposal account $1,200 (Trade-in value of old van)
CREDIT Cash account $1,800 (Cash paid)
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 2. To record cost of old van exchanged:
DEBIT Disposal account $2,000
CREDIT Motor van account (at cost) $2,000

CAUSES OF DEPRECIATION
• Wear and tear – all assets get use up with time through use, climatic conditions etc.,
mostly applicable to plant, equipment, and machines.
• Passage of time – time factor applies to all assets causing a finite useful economic life,
except freehold land with infinite life and hence not subject to depreciation. Certain
assets like patents, licences, and leasehold property are mostly subject to time factor
and depreciated (amortised) over the term during which the asset is usable.
• Technological changes – some assets become outdated or inefficient with an
improvement in technology, such as IT equipment, and hence to a very high rate of
depreciation owing to a relatively shorter useful life.
• Depletion of natural resources – some assets like mines, quarries, oil wells and
forests have a finite useful economic life as their use depends on the period over which
they can be exploited to extract natural resources like minerals, oil, coal, precious
stones etc.
• Other factors – a change in government legislation, a change in size of the business, a
change in the use of certain assets etc. Are other factors that limit the useful economic
life of assets.

METHODS OF CALCULATING DEPRECIATION

• Depreciation charge = an expense to be charged to Statement of Profit or Loss for
matching with the benefits generated by the use of the asset (an application of the
matching concept) = part of the net cost / depreciable amount of a non-current asset
(cost – estimated scrap value) that is allocated to each financial period over its
estimated useful economic life.
• Three main methods of calculating depreciation (determines how much of the
depreciation charge should be allocated to each financial period):
1. Straight line (Equal installment) method
2. Reducing balance method
3. Revaluation method
• The depreciation charge is based on:
C = Cost of the asset
N = Estimated useful economic life of the asset
S = Estimated scrap value of the asset at the end of its useful life

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1. Straight line method:
C −S
Annual depreciation charge = N
= Rate in % x Cost (minus any scrap value)
Annual depreciation remains fixed every year.

2. Reducing balance method:

Annual depreciation charge = Rate in % x NBV at start of financial period
Rate of depreciation = 1− N
S
C
NBV (Net Book Value) = Cost – Accumulated Depreciation to date
Annual depreciation decreases every year.

Annual
Dep’n Straight Line
($)

Reducing balance
0 Useful economic life (years)

3. Revaluation method:
Annual depreciation charge = Opening valuation + Additions – Disposals – Closing
valuation
Applies to a collection of similar assets like tools and equipment.

Calculations
Cost of asset (C) $25,600
Estimated useful economic life (N) 4 years
Estimated scrap value (S) $8,100

Straight line method:

Annual depreciation = (25,600 – 8,100) / 4 years = $4,375

Reducing balance method:

S
Rate of depreciation = 1− N
C
= 25%
Important useful formulae (for personal use only!):
NBV in Year k = C(1 – R)k
Depreciation charge in Year k = RC(1 – R)k -1

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 $
Initial cost 25,600
Less: Year 1 dep’n (25% x 25,600) (6,400)
NBV at end of Year 1 / Carrying amount at end of Year 1 19,200
Less: Year 2 dep’n (25% x 19,200) (4,800)
NBV at end of Year 2 14,400
Less: Year 3 dep’n (25% x 14,400) (3,600)
NBV at end of Year 3 10,800
Less: Year 4 dep’n (25% x 10,800) (2,700)
NBV at end of Year 4 (= Scrap Value) 8,100

QUESTION 1
The Office Equipment Account (at cost) of DCL for the year ended 31 December 2020 appeared as
follows:
Dr Office Equipment Account (at cost) Cr
2020 $ 2020 $
Jan 1 Balance b/d 11,300 Dec 1 Disposal 2,400
Apr 1 Bank 5,000 Dec 31 Balance c/d 13,900
16,300 16,300
1.1.21 Balance b/d 13,900
On 1 December the business sold an old equipment costing $2,400 (acquired on 1 January 2019) for
$1,700 cash.
The accumulated depreciation of office equipment as at 1 January 2020 was $6,300.
You are required to prepare the Accumulated Depreciation Account for the year ended 31
December 2020 and to calculate the profit or loss on the disposal assuming:
(1) Depreciation is charged at the rate of 20% per annum on cost on a proportionate basis.
(2) Depreciation is charged at the rate of 20% per annum on cost with full year depreciation in the
year of purchase and none in the year of disposal.
(3) Depreciation is charged at the rate of 20% per annum on reducing balance basis on a
proportionate basis.
(4) Depreciation is charged at the rate of 20% per annum on reducing balance basis with full year
depreciation in the year of purchase and none in the year of disposal.
[(1) Dep for the year 2970; Profit 220; (2) Dep for the year 2780; Loss 220;(3) Dep for the year 1718;
Profit 132;(4) Dep for the year 1616; Loss 220]

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QUESTION 2
The accounts of Delta Ltd contained the following balances as at 31 March 2003:
$
Motor vehicles (at cost) 23,200
Motor vehicles accumulated depreciation 13,250

It is the company’s policy to charge depreciation on all vehicles at the rate of 10% per annum on cost.
During the year ended 31 March 2004 the following transactions affected the company’s fleet of
vehicles:
4 June 2003 – A new motor car was purchased on credit from Executive Motors for the sales
representative costing $7,200.

2 July 2003 – An old motor van bought on 22 September 2001 at a cost of $1,200 was sold for $750 by
cheque.

29 July 2003 – An old delivery van costing $3,000 on 3 April 2000 was part-exchanged against a new
one at a trade-in value of $2,000. The balance of $400 was paid in full by cheque.

27 January 2004 – A lorry bought on 6 December 2002 at a cost of $4,800 was involved in an accident
and was declared a total loss by the insurance company that agreed to pay a compensation of $1,200.

As at 31 March 2004 one of the vehicles bought on 23 October 1993 costing $3,600 was fully
depreciated. The vehicle was scrapped and sold for $1,300 cash.

Required:
(a) Motor vehicles (at cost) account;
(b) Motor vehicles accumulated depreciation account; and
(c) Motor vehicles disposal accounts.
[Ans: (a) Bal c/d 20,200; (b) Charge for the year 2,560; Bal c/d 10,440; (c) Loss 240; Nil; Loss 3,040;
Profit 1,300]

REVALUATION OF NON-CURRENT ASSETS

• An upward revaluation to its current value (normally market value) gives rise to a
revaluation gain (profit or reserve, which is effectively an unrealised gain that cannot be
recognised to profit or loss) – recognised as ‘other comprehensive income’ and credited
to revaluation reserves:
Revaluation gain = Current Value – Written Down Value
• A downward revaluation to its current value (normally market value) gives rise to a
revaluation loss (or an impairment loss) – recognised to profit or loss, often as an
additional depreciation expense:
Revaluation loss = Written Down Value – Current value
• The depreciation of revalued non-current assets is based on the revalued amount (i.e.
current value) over the remaining useful economic life, i.e.
New annual depreciation charge = Revalued Amount ÷ Remaining useful economic life
(assuming straight line depreciation).
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QUESTION 3
Initial cost of freehold property on 1 January 2006 $800,000 (includes land costing $300,000).
Depreciation policy – Straight line depreciation over a useful life of 50 years.
Revaluation of property at current market value on 31 December 2010 at $940,000 (includes land at
$400,000).
Required:
Show ledger account entries and extracts of financial statements for the year ending 31
December 2011
[Ans: Revaluation gain 190,000 (or 188,000); Depreciation for the year 12,000; Net book value
928,000]

QUESTION 4
The written down value (net book value) of property, plant and equipment (PPE) at 1 July 2010 was
$230m. During the year a new equipment costing $12m was purchased to replace an old one with a
net book value of $2m. A building costing $90m (written down value $80m) was revalued at its current
market value of $100m. The value of PPE at 30 June 2011 was $235m.
Show the PPE Account to calculate the depreciation charge on PPE for the year ended 30 June
2011.
[Ans: 25m]

Offsetting of revaluation gains and losses

• Revaluation gains:
1. Recognised in profit or loss (= amount previously recognised as revaluation losses).
2. Remaining amount is recognized as ‘other comprehensive income’ and in equity under the
heading of revaluation surplus.
• Conversely for revaluation (impairment) losses → recognized immediately as expense
in profit or loss, unless there was a revaluation reserve previously representing a
surplus on the same asset:
1. Recognise in ‘other comprehensive income’ and equity (=revaluation surplus previously
recognized).
2. Recognise remaining amount to profit or loss.
• Offsetting of revaluation gains and losses are allowed when they relate to the SAME
asset.

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>>>MCQs>>>
1 A company’s plant and machinery ledger account for the year ended 30 September 2002 was as
follows:

The company’s policy is to charge depreciation at 20% per year on the straight line basis, with
proportionate depreciation in years of purchase and sale.
What is the depreciation charge for the year ended 30 September 2002?
A $74,440 B $84,040 C $72,640 D $76,840

2 At 31 December 2003 Q, a limited liability company, owned a building that had cost $800,000 on 1
January 1994.
It was being depreciated at two per cent per year.
On 31 December 2003 a revaluation to $1,000,000 was recognised. At this date the building had a
remaining useful life of 40 years.
Which of the following pairs of figures correctly reflects the effects of the revaluation?
Depreciation charge for year Revaluation reserve
ended 31 December 2004 as at 31 December
2003
A $25,000 $200,000
B $25,000 $360,000
C $20,000 $200,000
D $20,000 $360,000