ACC yellow

Capital expenditure

Expenditure that will benefit the business beyond the current accounting period as it will provide economic benefits beyond the current accounting period.
No effect on equity

Revenue expenditure

Expenditure that will benefit the business for the current period only, as it does not provide economic benefit beyond the current accounting period.

Decreases equity

Purposes of financial statements

Statement of accounting policies

Income statement

Statement of financial position

Statement of cash flow

Accounting policies

This informs users of the assumptions and concepts adopted in preparing the financial statements and how financial elements have been measured. It is an aid to understanding the statements.

P Income statements

To measure the profit/loss for the period and the components of the profit (income less expense)

P Financial position

To measure assets, liabilities and equity and the relationship between these elements at a point in time.

Cash flows

To show where cash has come from and how it has been spent over the period to be able to assess the entity’s ability to repay its debts and generate cash.

L Income statement

Does not include non-financial information, e.g. quality of goods sold or services provided, which may have an impact on the future of the business.

Depreciation and doubtful debts expense are based on estimates, so net profit may be inaccurate.

L Financial position

Assets are recorded at historical cost which may be out of date for lending purposes

Does not show non-financial information

Accumulated depreciation and allowance for doubtful debts are based on estimates so total net assets may be inaccurate.

Depreciation

It represents a decrease in economic benefits used up by the assets each accounting period.

Straight Line

Best reflects the decrease in economic benefits from using the asset. the decrease in economic benefit occurs evenly because the asset is used evenly throughout its lifetime.

Diminishing value

Best reflects the decrease in economic benefits from using the asset. The decrease in economic benefit occurs most at the start of the asset’s life, usually due to obsolescence.

Units of use

Best reflects the decrease in economic benefit from using the asset. The decrease in economic benefit occurs due to how much the asset is used rather than physical age.

Current assets

assets which are expected to be realised in the entity’s normal operating cycle.

Current liabilities

assets which are expected to be settled in the entity’s normal operating cycle.

Non-current asset

assets which are not expected to be realised in the entity’s normal operating cycle.

Non-current liabilities

assets which are not expected to be settled in the entity’s normal operating cycle.

S Capital expenditure

1. Benefit the entity beyond the current period

2. Because it is kept and used beyond current accounting period

3. provides economic benefit beyond current period

4. how it provides economic benefit

5. Position and condition

S Revenue expenditure

1. benefit entity for current accounting period

2. Because it is used up in current period

3. Only provides economic benefit for current period.