}When a business spends money on newnon-current assets it is known as capital investment or capital expenditure.
}Spending is normally irregular and forlarge amounts.
}It is expected to generate long-termbenefits.
The capital investment process
}Capital investment decisions normally represent the most important decisions that an organisation makes.
}They are normally high cost andlong-term.
}Examples of capital decisions:
1.Replacement of assets
2.Cost-reduction schemes
3.New product/service developments
4.Product/service expansions
5.Statutory, environmental and welfare proposals.
}To appraise a potential capital project:
ØEstimate the costs and benefits from the investment
ØSelect an appraisal method and use it to assess if the investment is financially worthwhile
ØDecide whetheror notto go ahead with the project
Capital expenditure
}Capital expenditure is expenditureincurred in:
ØThe acquisition of non-current assets required for use in the business and not for resale
ØThe alteration or significant improvement of non-current assets for the purpose of increasing their revenue-earning capacity.
}Capital expenditure is initially shown in the statement of financial position as non-current assets. It is then charged to the statement of profit or loss over a number of periods, via the depreciation charge.
Revenue expenditure
}Revenue expenditure is expenditure incurred in:
ØThe purchase of assets acquired for conversion into cash (e.g. goods for resale)
ØThe manufacturing, selling and distribution of goods and the day-to-day administration of the business
ØThe maintenance of the revenue-earningcapacity of the non-current assets (i.e. repairs, etc).
}Revenue expenditure is generally chargedto the statement of profit or loss for the period in which, the expenditure was incurred.
Capital and revenue expenditure
}In practice, there can be some difficultyin clearly distinguishing between alteration/improvement of non-current assets(capital) and their maintenance (revenue). }For example, is the installation of amodern heating system to replace an old inefficient system an improvement ormaintenance?
