Accounting for non-current assets

• Capital expenditure buys or improves non-current assets; revenue expenditure is the day-to-day running cost. Capital and revenue income are distinguished in the same way.
• Treating capital expenditure as revenue understates profit and assets; the opposite overstates them.
• Assets depreciate through wear and tear, the passing of time, obsolescence and depletion.
• Depreciation applies the matching concept (and prudence and consistency): cost is spread over the years that benefit.
• Straight-line: (cost − residual value) ÷ useful life. Reducing balance: a fixed % of the carrying amount.
• The cost model shows cost less depreciation; the revaluation model shows fair value, with gains credited to a revaluation reserve.
• A disposal account collects cost, accumulated depreciation and proceeds (or part-exchange allowance) to give the profit or loss on disposal.

Where does each item go?

Capital expenditure is spending on acquiring non-current assets or improving them so they earn more or last longer, including the costs of getting them ready for use (delivery, installation, legal fees on property). It is recorded in the statement of financial position. Revenue expenditure keeps the business running from day to day (wages, repairs, fuel, insurance) and is charged in the statement of profit or loss.

Capital income comes from non-trading sources that are not part of normal operations: capital introduced by the owner, a loan received, proceeds from the sale of a non-current asset. Revenue income is earned from normal activities: sales, rent received, commission received, discounts received.

Profit and asset values both go wrong

If capital expenditure is charged as an expense, profit is understated by the amount charged, less the depreciation that would have been charged on it, and non-current assets are understated. If revenue expenditure is capitalised, profit and assets are overstated.