Question

Distinguish between the accounting for capital expenditures and revenue expenditures. What is the key difference between the two? Go online and type in your favorite search engine, "capital expenditure policy." Why do you think there needs to be a policy about capital expenditures? Keep in mind, how each type impacts the financial statements. Please read below taken from Chapter nine: Ethics: Don't Do It! Capital Crime One of the largest accounting frauds in history involved the improper accounting for maintenance expenditures. WorldCom, the second largest telecommunications company in the United States at the time, improperly treated maintenance expenditures on its telecommunications network as capital expenditures. As a result, the company had to restate its prior years' earnings downward by nearly $4 billion to correct this error. The company declared bankruptcy within months of disclosing the error, and the CEO was sentenced to 25 years in prison.

Answer 1

Capital expenditures

An expenditure is a capital expenditure if the benefit of the expenditure extends to several trading years. Capital expenditure may include the following expenditures:-

Expenditure incurred on the acquisition of fixed assets, (tangible or intangible) which are related to the business for the purpose of earning profit and not for resale such as land and building, plant and machinery, furniture & fixture, goodwill, patent rights and copyrights etc.

Revenue expenditures

An item of expenditure whose benefit expires within the year is revenue expenditure. Revenue expenditure does not increase the efficiency of the firm.

Examples of Revenue expenditures

• All expenses incurred in the ordinary conduct of business, such as rent, salaries, wages, manufacturing expenses, carriage, commission, legal charges, insurance and advertisement, free samples, salaries, postage expenses etc.
• Expenses incurred by way of repairs, renewals and replacement for the purpose of maintaining the existing fixed assets of the business in working order.

Key Difference

1. Capital expenditure generates future economic benefits, but the Revenue expenditure generates benefit for the current year only.
2. The major difference between the two is that the Capital expenditure is a one-time investment of money. On the contrary, revenue expenditure occurs frequently.
3. Capital expenditure is not matched with the capital receipts. Unlike revenue expenditure, which is matched with the revenue receipts.

Capital expenditure policy

The purpose of this policy is to establish procedures and provide guidelines for the approval and control of all capital expenditure, and the disposal and transfer of fixed assets. It also aims to ensure that all capital expenditure is consistent with the strategic directions of concerned regulatory body.

capital expenditures represent substantial investments of cash designed to show a return on the capital investment over a period of years, it is important for companies to carefully plan for them.So, there is need for a policy about capital expenditure.