Capital Expenditure Versus Revenue Expenditure

In the realm of financial accounting, various classifications exist to determine how to treat values. With reference to expenditure, financial accountants need to know whether to treat it an as asset or expense. Capital expenditure and revenue expenditure are the two fundamental classes of expenditure.

Capital expenditure refers to expenditure on the procurement or enhancement of non-current assets (assets that the business intends to keep for 12 months or longer). Revenue expenditure refers to expenditure that the business incurs either for the purpose of trade or for maintenance of the earning capacity of non-current assets.

The key issue between capital and revenue expenditure is whether it can appear in the Statement of Financial Position (balance sheet) or not. Any expenditure that does not increase the net book value of non-current assets or result in the appearance of a new one on the Statement of Financial Position is an expense. Recall that expenses are deducted from gross profit in the Statement of Comprehensive Income.

Naturally, classifying expenditure as revenue or capital expenditure is important, since it would determine the impact on the assets of the business or its profitability. It is also critical to note that actions on a non-current asset can result in either class of expenditure. For instance, suppose a business purchases a motor vehicle and has it modified to improve its fuel efficiency. In addition to this, during the course of the year, other expenses like insurance and maintenance crop up.

The amount that the business used to purchase the vehicle is capital expenditure because the motor vehicle would now appear on the Statement of Financial Position and the business intends to keep the car for more than a year. The cost of the modification to improve fuel efficiency is expenditure that improves the earning capacity of the motor vehicle and increases its net book value. Therefore, the modification is also capital expenditure and should not be written off as an expense. The insurance and maintenance costs associated with the motor vehicle represent revenue expenditure on a non-current asset.

Although capital expenditure is not charged to the income statement, depreciation on non-current assets eventually account for the capital expenditure over time. Recall that accumulated depreciation decreases the net book value of a non-current asset and the current depreciation expense is charged to the income statement. This helps to reinforce the fair presentation assumption.

The distinction between capital and revenue expenditure is critical in financial accounting as it determines the treatment of the expenditure and how the business' operations are presented.

Capital Expenditure Vs. Revenue Expenditure

Capital expenditures are assets that are acquired to expand business capacity to earn or produce. Costs that are attributed to maintaining earnings or capacity are revenue expenditures.

      Accounting
  Revenue expenditures are noted on income statements and a capital expenditure is placed on       the   
  balance sheet.
      Working capital
  Although capital expenditures are typically machinery or some other physical asset, they       can also  
  include research and development. This is because research and development       expands production 
  ability, earnings and capacity.
      Industries  A capital expenditure in one industry may be a revenue expense in another company. One       example is a
  real estate company that purchases land or buildings for resale. This is not       a capital expenditure, even
  though it is a physical asset, because its purpose is to be       resold.
      Raw materials
   Although raw materials are used in the earnings process, and increasing the amount of raw       materials 
   that are purchased and used may increase production, these are revenue       expenditures.
      Day-to-day
   The day-to-day costs of running the business, including salaries, utilities, repairs,       maintenance, fees, rent
   and taxes are all revenue expenditures.

The Importance of Strong Operations, Capital, Tax, Debt Service and Insurance Reserves

As investors the attraction of keeping cash in our pocket can seem irresistible. When our property is performing well and the cash flow is strong, we are tempted to believe that with so much available cash each month that reserves are not necessary. We can convince ourselves that the risk is not worth the worry or the cost. However, protecting the asset is as important as making the cash flow. Because of this, strong reserves are critical.

The temptation to take reserves and enjoy the cash is strong. Reserves can hold $10,000 or $100,000 or even $1,000,000 captive on relatively small investments. When large sums such as this are involved the temptation to make other use of these funds is strong.

However, a tax lien, the catastrophic loss of a building, the failure to make needed capital improvements can be much more damaging. The failure to fund reserves results in potential catastrophic asset loss and eroded asset value.

In many cases, if taxes are not paid, a property could face a tax foreclosure in a matter of less than 6 months. Tax reserves are a critical to protecting the investors' asset. Immediately behind tax liens, a well run property should maintain reserves to assure insurance is maintained, to guarantee that if occupancy drops or income wanes that interest and principal payments will be kept current, and to assure that needed improvements to the project will go forward.

The purpose of debt cost reserves is obvious in the same way that tax and insurance reserves are easy to understand.

Capital and operations reserves are more easily skipped. Over the course of time, these decisions will insidiously undermine income pushing the potential income of the property downward. If the situation persists long enough and serious enough improvements are not made the property can become unrentable. All at once a quality asset becomes a burden and a loss to the investors. Additionally, if capital reserves are kept steadily, strong the owners and management will have the opportunity to make good choices that instead of preventing value erosion will lead consistent asset appreciation. Truly, the result creates reinforcing positive results just as not funding creates consistently damaging results.

Value focused owners will see to adequate tax and income reserves, well planned debt cost reserves, and steady strong capital reserves. Making this choice protects invest capital and offers the potential of steadily appreciating total asset value - the preferred goal of any serious investor.

Basics of Homeowners and Renters Insurance

Homeowners insurance covers your personal home, including the contents of your home, and any personal belongings you or members of your household use, own, wear or carry-basically everything and the kitchen sink. Many Homeowners policies cover your personal belongings and/or contents anywhere in the world. This insurance coverage is also based on your house's coverage, and there are limits on the losses that can be claimed for certain items, such as cash, furs or jewelry-limits that can be increased with supplemental premiums. Homeowners insurance can help restore or replace what you have lost, and compensate those who have been injured as well. Don't even think about being without it, for the risk is too great. Homeowners insurance rates vary from insurance company to insurer but for the most part take the same things into consideration. Therefore, it is important to know how you, your home and the location you live in affect what you pay for insurance. Homeowners insurance is always a good idea, as homes cannot avoid damage. It's a good idea to get several home insurance quotes to find out what sort of policies and insurance rates you can get for your property. Homeowners insurance helps pay to repair or reconstruct your home and replace personal property due to a covered loss.

Homeowners insurance usually does not cover landslide damage. I have been to many homes that have been damaged by landslides and have only heard of one situation where the homeowners insurance company paid for the loss (after a lawsuit determined that the damage was done by a rock fall and the insurance did cover damage from falling objects).

A form of Homeowners Insurance that many people don't know about is Renters Insurance. Renters Insurance is extremely important for anyone who is renting an apartment, house, or condo. Renters Insurance has both benefits and limitations, but not having it can cause extreme hardship in the event of a loss as Rental Home & apartment owners aren't responsible for the personal belongings or liability exposures of their tenants. Renters insurance coverage protects the tenant from the unexpected and is generally inexpensive, so having it is a no-brainer.

Actual cash value is the amount it would take to repair or replace damage to your home after depreciation. Actual-cash-value coverage reimburses you for the cost of your property at the time of the claim, minus the deductible. Actual Cash Value coverage might not produce the amount of coverage and/or reimbursement that you might expect Actual cash value factors depreciation into the value of your house, while replacement cost covers the cost of repairing and/or replacing damaged parts of your house, which can be more than the depreciated value. You also need to consider the other property you own in your house, such as furniture, appliances, clothing, and more.

If you live in Indiana, Erie Insurance is a great company that provided insurance services to Indiana residents. Erie Insurance has been recognized on the list of Ward's 50 Group of top performing insurance companies. The Ward's 50 award analyzes the financial performance of 3,000 property and casualty companies and 800 life-health insurance companies and recognizes the top performers for achieving outstanding financial results in safety and consistency over a five-year period (2004-2008).

Principles of Insurance

There are certain principles of insurance which could be followed

A large number of homogenous units: A large number of insurance policies are provided for individual members. Insurance given against a vehicle to millions or some other insurances the existence of a large number of people allows the insuring giving companies to benefit from "law of large numbers" which is described as a result that is performed by repeating the same experiment continuously. The law of large numbers has affected a large number of states which has increased a large number of exposure units. Whereas the actual results are increasing that are likely to become to the expected proportions.

Lloyd's of London is famous for giving insurance for the health or life of the actors, underwriters, sports personality and many more. Larger commercial properties have certain polices that may insure exceptional properties which has no homogenous exposure units. Many homogenous exposure units are considered to be insurable.

Calculable Loss: This category consists of two elements one is known as attendant cost and the other is the probability of loss. Probability of loss is driven from experiment and observation of a person's loss while the attendant cost has more to do with a person who holds his chattels and a copy of insurance policy and claims a property under the policy which retains an object or the amount of loss recoverable as a result of the claim.

Affordable Premium: Insurance will not be sold if it is too high, which results to a premium which is large compared to the amount that is offered against protection or the cost of the event is too high. Moreover the premium should not be so high that it would affect a loss to the insurer. If there are no chances of loss then the transaction would be in form of insurance.

Large Loss: This depends on the size of a loss. Insurance premiums have to cover both cost of issuing and the expected cost of losses and also adjusting the losses as well as the administrative policy. The insurance premiums supplies the capital that is needed by assure that is given by the insurer who will be able to pay the claims.

Accidental Loss: Insurance will be given to a person during an accident when the person proves it to be real. In this case if there is a loss in the in an ordinary business then the owner is not liable to be paid the insurance.

Definite Loss: In case of a sudden demise of a person, the members are liable to get the insurance. The other factors that meet these criteria are in case of an accident or workers who are injured at the work places. Similarly, if one has to claim insurance then he has to prove the insurance company about the loss n which the time, place and the loss of the person are taken under consideration. Whereas in case of an occupational disease a person cannot claim for insurance benefits, the reason behind this is occupational disease may involve prolong time, place or cause which is identifiable.

Examples of Capital and Revenue Expenditure

Although the definitions of capital and revenue expenditure provide a clear basis for distinguishing between them, it is always useful to use examples to understand fully how the definitions translate in reality. Capital expenditure is basically expenditure on the acquisition or improvement of a non-current asset. Revenue expenditure is that on the acquisition of tradable assets or mere maintenance of the earning capacity of a non-current asset.

== Acquisitions and costs associated with acquisition ==

Both forms of expenditure can result in the acquisition of assets, but for different purposes. Examples of capital acquisitions include the purchase of an office building and the purchase of a vehicle for business use. However, in acquiring a capital asset, certain costs are incurred, such as carriage inwards, installation costs, import duties and valuator fees. Those costs are included as part of the acquisition cost and form part of capital expenditure as well.

Revenue expenditure acquisitions involve those of trade able assets or assets that can be fully utilized within one accounting period. As a result, the purchase of trade able goods or raw materials is an expense to be written off in the period. Recurring expenditure, such as stationary, also form part of revenue expenditure since these costs are minor and the assets require frequent replenishing or replacement. In addition, an entity might acquire a vehicle or building, but pays rent for it. Such expenditure is of the revenue genre since it is consumed fully utilized in the period.

== Improvement or maintenance ==

The distinction between revenue and capital expenditure is also the distinction between improving and maintaining a non-current asset. Let us use a movie theatre for this example. Assume that the movie theatre is merely repairing old seats and re-upholstering, without increasing the seating capacity of the movie theatre.

Although the benefit of that change would extend to several accounting periods, it is not capital expenditure. This is because repairing the seats does not necessarily improve the earning capacity of the movie theatre. However, if the theatre added more seats, it is improving its asset-not merely maintaining it. In addition, if the movie theatre replaces the old seats with new ones, it can consider this capital expenditure.

== Other examples of the forms of expenditure ==

Depreciation of non-current assets: Revenue Exp.

Insurance, salaries and regular maintenance: Revenue Exp.

Major repairs of a fixed asset that increases its productivity: Capital Exp.

Transport costs for trade able assets: Revenue Exp.

Transport and installation costs for non-current assets: Capital Exp.

The examples of capital and revenue expenditure are by no means exhaustive. What is important is that an entity classifies its expenditure correctly, according to the business context, and consistently, according to prior classifications.

Own Your Own Insurance Business

 Envision your future. What do you see? Is your path free of obstacles, or fraught with difficulties?

With all of the financial information available to people these days, it is often difficult to know what to make of it.

When you work with Capital Resources and Insurance, Inc., you needn’t worry about all the details, because we assume the responsibility for understanding the financial complexities and recommending a course of action that fits your specific needs.

As your dedicated partners, we'll help you improve your financial life today and create a secure tomorrow.