Capital Expenditure and Depreciation

🧠 1. Explain it to a 12-year-old

Capital expenditure is when a company buys big things—like a car, building, or machine—that they plan to use for many years. These are not day-to-day expenses but long-term investments. You don’t count the whole cost as an expense right away because you’ll use the item for a long time.

Instead, you use depreciation to spread the cost over the years you’re using it. It's like if you bought a laptop for €1,000 and used it for 5 years—you’d count €200 each year as the cost (this is called straight-line depreciation).

🛠 2. Identify gaps

Let’s clarify:

• What’s the difference between capital expenditure and revenue expenditure?

• How do you record depreciation?

• What’s the difference between direct and indirect depreciation?

• What happens when the asset is sold?

📘 3. Go back to the source (based on the PDF)Capital Expenditure & D…:

🔹 Capital Expenditure (CapEx)

• Used to buy non-current assets (last >1 year).

• Shown on the statement of financial position.

• Includes installation, testing, and transport costs to get it ready for use.

• Examples: buying a machine, renovating a building.

• NOT: interest on loans, day-to-day repairs.

🔹 Revenue Expenditure

• Short-term expenses for daily operations.

• Shown on the profit or loss statement.

• Examples: wages, electricity, repair costs.

🔹 Depreciation

• Systematic allocation of the cost of an asset over its useful life.

• Starts when the asset is in use.

• Depreciation is a non-cash expense that reduces profit.

• Methods:

  • Straight-Line: Equal amount every year.

    Annual Depreciation=Cost−Residual ValueUseful Life\text{Annual Depreciation} = \frac{\text{Cost} - \text{Residual Value}}{\text{Useful Life}}Annual Depreciation=Useful LifeCost−Residual Value​

  • Reducing Balance: Applies a percentage to the remaining value each year.

🔹 Accounting Entry

• Direct Method:

  • Dr. Depreciation Expense

  • Cr. Asset

• Indirect Method (preferred):

  • Dr. Depreciation Expense

  • Cr. Accumulated Depreciation

🔹 Selling an Asset

• Compare the sale price (net of VAT) with the Net Book Value.

• If selling price > NBV → gain

• If selling price < NBV → loss

🎙 4. Retell it simply (Oral Exam Style)