Something that I notice when reviewing bookkeeping is the confusion between Capital and Revenue Expenses. Unless you’ve done accountancy training, it can be a slightly tricky concept to grasp. Surely whatever you spend is an expense? Or anything to do with Fixed Assets must be Fixed Assets?
So, what is the difference?
Capital Expense
A Capital Expense represents an investment in the business. You may be familiar with the term ‘fixed assets’ which is – Land & Buildings, Plant & Machinery, Equipment, Furniture & Fittings, Motor Vehicles and Long term Investments. In other words, they’re pieces of equipment that help you generate revenue and do your job; that you don’t tend to buy every year. For example, buying a new chair, or an iTero machine, would be a capital investment.
When you get your accounts, you’ll find these items recorded as fixed assets, and you’ll be able to see a breakdown of the total cost of the assets, together with any depreciation that’s been charged to date.
Revenue/Operating Expenses
These expenses are regularly incurred while doing business. These include materials, stationery, light and heat, wages, fuel, bank fees, subscriptions etc, etc.
Some of these expenses could be linked to the assets we went through above, but just because they’re related doesn’t necessarily mean they will also be capital in nature. For example, your new dental chair breaks down and needs a repair. As this is just maintaining the asset and does not enhance it in any way, this is a revenue cost. Generally speaking, consumable short life purchases will be classed as revenue and will show in your profit and loss for the year.
How to analyse the bookkeeping
If you’re completing your bookkeeping and wondering if a transaction should be revenue or capital, think about the following:
“Is this a large one off purchase that’s going to stay in the business for a number of years and help improve my business?”
If the answer to that question is yes, then you’re most likely looking at a capital purchase, and you should look to allocate this to one of your asset codes, rather than something like material purchases or repairs.
Of course, what’s big to one business may not be big to another, so you should apply some judgement and context when deciding if it’s a new capital purchase or not.
If you are ever unsure, our team of experts will be happy to help assess your situation with you.
