We are small business Accountants in UK. We are Xero Expert Accountants.
In maintaining accounting records it important to distinguish between capital and revenue expenditure items. This is because these are treated differently in the financial statements.
These refer to items which are not consumed within one year or not for resell by the business. For example, the trailers bought by a mobile catering trailer business are capital in nature. This is because the business will use the trailers over a longer term (greater than one year). These trailers are used in the manufacture & sale of the products. The trailer cost will be reflected as asset in the business and will be subject to periodic depreciation based on the estimated economic life of the asset. The period or yearly depreciation will be shown as revenue expense in the profit and loss account. So, depreciation is simply to spread the total cost of the asset over the useful life of the asset. As you can see, this only makes sense.
Revenue expenditure are those which relate to the trade of the business. In our example of a mobile catering trailer business, the stocks, fuel costs,staff wages, repair of catering equipment are the revenue expenditure. These are reflected in the annual profit and loss accounts to off set against income to arrive at net profits before tax. We include these in profit and loss account as these expenses are consumed within a year while generation income of the business. So, it only makes sense to reflect these along with the income of the year.
If you need any help to understand the above, please Contact Us. We’ll guide you on what expenditure to reflect as assets in the balance sheet or expenses in the profit and loss account.
ERAA Consulting Limited are excellent small business accountants in the UK.