P2
Explain the difference between capital and revenue expenditure and income. Make sure that
you give a clear definition of each term. Provide examples appropriate to a selected business.
Definitions with examples to a selected business (Tesco)
1.Capital income- is income generated by an asset over time, rather than from work done using
the asset. For example, if a farmer buys land for a certain amount of money and sells it at a
profit after one year, the difference in the prices is capital income. For Tesco, they can buy a
building for a small price like £400,000, after three years the price doubles when they sell the
asset for £800,000. As you can see they have generated a profit of £400,000 which is the
Capital income for that building.
2.Capital expenditure- is the amount of money that is spent to acquire or maintain physical
assets such as property, industrial buildings or equipment. The assets cannot be deducted from
income for tax purposes, instead the value of the capital expenditure is added to the the
company's assets and the value is reduced due to depreciation. Physical assets are essential
for the production of goods, which means every year the company would have to spend money
to repair or replace old equipment or expand purchases for new equipment. Which reduces the
amount of cash flow of the company. For Tesco, they might buy a factory and replace all the old
equipment with new ones so that it is more productive.
3.Revenue income- Money that is earned by the business carrying out operating activity, this
can come from: manufacture and sales of goods, reselling of goods originally bought for resale,
extraction and sale of raw material, provision of service and rental of property and goods. In
other words, income generated by sales of goods or services. For example, Tesco can buy
goods cheaply and sell them off double the price so that they make profit out of it.
4.Revenue expenditure- are shorter-term expenses required to meet the ongoing operational
costs of running a business, and thus are essentially the same as operating expenses. Unlike
capital expenditures, revenue expenses can be fully tax-deducted in the same year the
expenses occur. In relation to the major asset purchases that qualify as capital expenditures,
revenue expenditures include the ordinary repair and maintenance costs that are necessary to
keep the asset in working order without substantially improving or extending the useful life of the
asset. Revenue expenses related to existing assets include repairs and regular maintenance as
well as repainting and renewal expenses. Revenue expenditures can be considered to be
recurring expenses in contrast to the one-off nature of most capital expenditures. For example,
if one day Tesco has a self service checkout machine that doesn’t work, they will need to repair
it immediately so that more customers can pay for their shopping quickly and allow the
operation of the store to continue normally.
Explain the difference between capital and revenue expenditure and income. Make sure that
you give a clear definition of each term. Provide examples appropriate to a selected business.
Definitions with examples to a selected business (Tesco)
1.Capital income- is income generated by an asset over time, rather than from work done using
the asset. For example, if a farmer buys land for a certain amount of money and sells it at a
profit after one year, the difference in the prices is capital income. For Tesco, they can buy a
building for a small price like £400,000, after three years the price doubles when they sell the
asset for £800,000. As you can see they have generated a profit of £400,000 which is the
Capital income for that building.
2.Capital expenditure- is the amount of money that is spent to acquire or maintain physical
assets such as property, industrial buildings or equipment. The assets cannot be deducted from
income for tax purposes, instead the value of the capital expenditure is added to the the
company's assets and the value is reduced due to depreciation. Physical assets are essential
for the production of goods, which means every year the company would have to spend money
to repair or replace old equipment or expand purchases for new equipment. Which reduces the
amount of cash flow of the company. For Tesco, they might buy a factory and replace all the old
equipment with new ones so that it is more productive.
3.Revenue income- Money that is earned by the business carrying out operating activity, this
can come from: manufacture and sales of goods, reselling of goods originally bought for resale,
extraction and sale of raw material, provision of service and rental of property and goods. In
other words, income generated by sales of goods or services. For example, Tesco can buy
goods cheaply and sell them off double the price so that they make profit out of it.
4.Revenue expenditure- are shorter-term expenses required to meet the ongoing operational
costs of running a business, and thus are essentially the same as operating expenses. Unlike
capital expenditures, revenue expenses can be fully tax-deducted in the same year the
expenses occur. In relation to the major asset purchases that qualify as capital expenditures,
revenue expenditures include the ordinary repair and maintenance costs that are necessary to
keep the asset in working order without substantially improving or extending the useful life of the
asset. Revenue expenses related to existing assets include repairs and regular maintenance as
well as repainting and renewal expenses. Revenue expenditures can be considered to be
recurring expenses in contrast to the one-off nature of most capital expenditures. For example,
if one day Tesco has a self service checkout machine that doesn’t work, they will need to repair
it immediately so that more customers can pay for their shopping quickly and allow the
operation of the store to continue normally.
