Revenue and Capital Expenditure
The main purpose of financial reporting is to provide financial information about a business that is useful to existing and potential investors, lenders and other creditors in making decisions relating to providing resources (capital) to the business. Information about business expenditures is useful to users and might influence the decision of the users with regard to providing capital in the business. This information may also enhance fair presentation of financial statements. An expenditure is any cost incurred by the business whether when acquiring a good or a service that has benefitted or that in the future will benefit the business.
Revenue expenditure
These are costs incurred by the business on it normal day to day operations. They include (not limited to) cost of purchasing costs (purchases of goods, carriage inwards, import duties) and all expenses. They are recognized (recorded) in the income statement and reduces the value of profit.
Capital Expenditure
These are cost incurred by the business when acquiring non-current assets and all other costs bringing the non-current asset to a ready-for-use state. They include (not limited to) cost incurred when purchasing the non-current asset, cost of transporting it to the business premises, legal cost incurred, installation costs, rights to use the assets etc. They are initially recognized at cost price in the statement of financial position, applying the historical cost concept.
Subsequently, depreciation expense is charged in the income statement and recognized at COST - ACCUMULATED DEPRECIATION = NET BOOK VALUE in the statement of financial position.
Effect of wrongful recognition on profit and assets.
If an item of Revenue expenditure was wrongfully recognized as item of capital expenditure, Profits will be overstated, and the total of non-current assets will be overstated.
If an item of Capital expenditure was wrongfully recognized as item of revenue expenditure, Profits will be understated, and the total of non-current assets will be understated.