Revenue and Capital Expenditure
Revenue and Capital expenditure are slightly different. Revenue expenditure is money that is spent on items that are only going to be used once, such as printer paper, stock, repairs, petrol etc. These items would go under expenses in the profit and loss account and would be included as part of revenue in balance sheet.
Capital Expenditure is money spent by a business on items that are going to be used more than one time, for example machinery, buildings and vehicles. These would go under expenses in the profit and loss account. In the balance sheet they would go under assets (fixed) and the cost of them would go down as a short term liability.
Depreciation is the way in which items lose their value as time progresses. For example, a van bought by a business for $10,000 might only be worth $5,000 in 2 years time and therefore it has depreciated in value.
There are several methods of working out depreciation, the fixed percentage method whereby a certain % is taken from the value each year. This is a relatively accurate estimate of depreciation. The most commonly used method (the straight line method) is less reliable. It assumes that an item will decrease in value by the same amount each year until it reaches its residual value (the amount of money that I will always be possible to get for the item).
For example, the van mentioned earlier would have an annual depreciation of $2,500.
Depreciation can only be estimated and it is important to get an accurate estimate because the figure will be used in the accounts of a business. If too much depreciation is assumed then the business will pay too little tax for the value of the item(s) and if found out they could be in trouble for tax evasion. However, if too little depreciation is estimated then the business pays more tax than it is required to therefore losing out on profits.
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