Question

Part 3 - Role Play Activity with your manager at is part of the assessment is a roleplaying activity. You will be roleplaying a discussion Jour manager Lily Thompson to discuss and accounting issue with her and gain understanding of what you need to do. Scenario You were about to enter the following invoice into the accounting system but you are unsure about the breakdown between capital expenditure and revenue expenditure. You know they are treated differently. You need to discuss this issue with Lily (your business manager) and ask questions to ensure that you understand which items are revenue expenditure and which are capital expenditure. Tax Invoice 173 Computers R Us ABN 88 143 526 096 324 Punt RD Richmond 3121 VIC TO: Micro Systems 226 Smith St, Bayswater 3153 Date: 12/6/20 Purchase Order Number: John Terms: 30 days Unit Price Quantity Item Number Description Total inc. GST Tax Code ine. GST HP101 HP Laptop 2000 200 GST HDTB Hard Drive upgrade 500 MOS 350 HLP Microsoft Office Software 1 years Help Desk Support Epson Printer 70 50 GST 35 GST 7 GST 50 GST 10 GST EPPR 500 CART Printer Cartridges 100 Amount of GST in this invoice: $382 $4202 Version 30/1/2020 Review June 2020

Answer 1

1. Hello, my name is Ryan and I am taking the unit capital vs revenue expenditure in the subject Accountancy. Following is a role playing exercise between me and my business manager Lily, to highlight and understand the difference between capital and revenue expenditure.

2. Ryan: Hi Lily, I was entering an invoice for purchases that we made from out computer vendor Micro systems. It is a general tax purchase invoice and there are several items on the list. My dilemma is which of these items should be classified as revenue expenditure and which of them should be capital expenditure. My understanding is that capital expenditures are for fixed assets, which are expected to be productive assets for a long period of time. Revenue expenditures are for costs that are related to specific revenue transactions or operating periods, such as the cost of goods sold or repairs and maintenance expense.

Lily: Hi Ryan, your understanding is correct. To elaborate, capital expenditure includes costs incurred on the acquisition of a fixed asset and any subsequent expenditure that increases the earning capacity of an existing fixed asset. The cost of acquisition not only includes the cost of purchases but also any additional costs incurred in bringing the fixed asset into its present location and condition (e.g. delivery costs).

Capital expenditure, as opposed to revenue expenditure, is generally of a one-off kind and its benefit is derived over several accounting periods. Capital Expenditure may include the following: Purchase costs (less any discount received), Delivery costs, Legal charges, Installation costs, Up gradation costs, Replacement costs.

Revenue expenditure incurred on fixed assets include costs that are aimed at 'maintaining' rather than enhancing the earning capacity of the assets. These are costs that are incurred on a regular basis and the benefit from these costs is obtained over a relatively short period of time. For example, a company buys a machine for the production of biscuits. Whereas the initial purchase and installation costs would be classified as capital expenditure, any subsequent repair and maintenance charges incurred in the future will be classified as revenue expenditure.

3. Ryan: Thank you for the detailed explanation on the classification of expenditure. As per my knowledge and considering the points you just explained, I have classified the items in the invoice as follows, please let me know if I got them correct:

Item	Classification
HP laptop	Capital expenditure. It is cost on acquisition of fixed asset laptop
Hard drive upgrade	Capital expenditure. It is subsequent expenditure that increases the earning capacity of an existing fixed asset
Microsoft office software	Capital expenditure. It is cost on acquisition of Intangible fixed asset software.
1 Year help desk support	Revenue expenditure. It is a cost that is aimed at 'maintaining' rather than enhancing the earning capacity of the assets.
Epson Printer	Capital expenditure. It is cost on acquisition of fixed asset printer.
Printer Cartridges	Revenue expenditure. It is a cost that is used up within a year.

Lily: Yes, excellent! All of the above are correct classifications of revenue and capital expenditure. You may go ahead and account them into the system.

4. Ryan: Thank you very much for your assistance and time in guiding me through the process of classification of revenue and capital expenditure. Much appreciated.