Non-current Assets
Capital & Revenue Expenditure
Questions test your ability to classify expenditure as capital (added to an asset) or revenue (charged to the income statement), and to explain the effect of misclassification on profit and asset values.
Be precise when explaining misclassification effects — state the direction (overstated/understated) and which figure is affected (profit, non-current assets, expenses). A vague answer will not score full marks.
Key Concepts to Revise
Capital Expenditure
Spending that provides benefit over more than one year — buying, improving, or extending a non-current asset. Added to the asset’s cost.
Revenue Expenditure
Day-to-day spending that benefits only the current period — repairs, maintenance, wages. Charged to the income statement.
Effect of Misclassification
Treating capital as revenue: understates profit and understates assets. Treating revenue as capital: overstates profit and overstates assets.
Common Examples
Capital: new machinery, legal fees on purchase, installation costs. Revenue: insurance, repairs, fuel, rent, wages.