Capital Expenditure and Depreciation

Capital Expenditure (CapEx)

Money spent to buy or improve long-term assets like buildings, machines, or vehicles.

Revenue Expenditure

Everyday business costs like rent, wages, or repairs that are recorded as expenses in the same year.

Where do we show Capital Expenditure?

On the Statement of Financial Position (Balance Sheet) as a non-current asset.

Where do we show Revenue Expenditure?

On the Profit or Loss Statement (Income Statement) as an expense.

Depreciation

A method to spread the cost of a non-current asset over the years we use it.

Why do we use Depreciation?

To match the asset's cost to the periods it helps generate income and avoid overstating profit.

When does Depreciation start?

When the asset is ready for use, not when it is purchased.

What is the formula for Straight-Line Depreciation?

AnnualDepreciation=\frac{Cost-ResidualValue}{UsefulLife}

What is the formula for Reducing Balance Depreciation?

Depreciation=NetBookValue\times Rate\left(\%\right)

What’s the difference between Straight-Line and Reducing Balance?

• Straight-Line = same amount every year

• Reducing Balance = percentage of remaining value, so it gets smaller each year

What is Residual Value?

The amount you expect to sell the asset for at the end of its useful life.

What journal entry is used for depreciation (indirect method)?

• Dr. Depreciation Expense

• Cr. Accumulated Depreciation

What happens when we sell an asset?

Compare the selling price with the Net Book Value to calculate gain or loss.

What is Net Book Value (NBV)

NBV=Original Cost−Accumulated Depreciation

Is maintenance a capital or revenue expenditure?

Revenue expenditure – it’s a regular cost that does not increase the value or life of the asset.