Anyone,advice on the capital and revenue expenditure.
As we just opened our food shop we are in process of putting lots of shelving and fixing the premises from inside,hence high value material purchases from B & Q.(£500 + two months in the row)
I put that through the books as a revenue expense although improvement of fixed assets should be classed as a capital expenditure?
Is there a guide where i can read more on differences between two types of expenditure?
P.S. I was told when books are inspected by HMRC people ,there are two things they don't like 1.The same amount of opening and closing stock year after year. 2. High repairs and renewals expense accounts.
You should only include in a year's accounts, costs that apply to that year. This includes all your revenue costs (subject to adjustment at year end for next year's costs paid in advance this year (prepayments) and vice versa (accruals).
Your shop fittings are going to last over several years so you should spread the cost over those years, these are capital costs. You spread the cost by putting a depreciation charge in each year's accounts. Several ways of working depreciation out, common ways are: - "straight line" - you estimate life of assets and spread costs evenly, so if you reckon they will need replacing in 5 years, you apply ("write-off") 20% of cost to each of those years (probably method you should use for shop fittings) - "reducing balance" where you apply a set percentage each year to the reducing value of asset, as asset value reduces so deprecition charge is less year on year, also value of asset never reaches zero. This is typically applied to motor vehicles.
This is basically what it is about, lots of books on the subject and info to read on the internet.
I'm not in practice yet so prefer to let others answer your final qustions, except to say that having same stock figure just looks like you haven't bothered to stock take and stock value is important in working out profits, hence HMRC concern.
-- Edited by PhilMcTankup on Thursday 30th of September 2010 07:46:57 PM
Edit: Personally, I wouldn't consider the difference between capital and revenue expenditure as basics, it's a very contentious area. When a previous employer renovated the offices, the Tax Manager from our Auditors spent 3 days on site working through all the invoices and debating which was which ;)
-- Edited by ADAS on Thursday 30th of September 2010 08:48:21 PM
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Tony
Responses are intended as outline only. Formal advice should be sort from your Institutes Technical Department or a suitably qualified Accountant.
True it is very cotentious area. When we moved to new premises we had to buy lots of building materials e.g. New tiles,floor boards kitchen sink etc.Personally i would class that as a capital expenditure and any high value purchase for repairs and renewals a/c,as these items are not for sale or shop running costs. Then again which a/c should it affect.
e.g. When you buy machinery it is Dr.Machinery Cr. Bank (or Creditors) and then depreciate the equipment over few years,
When you capitalise materials purchased for improvement which accounts should i use Dr ? Cr Bank (or Creditors)?
Quite a lot reading to do.Thanks for the link form HMRC
If you were improving an asset that the business owned then I would debit the cost of the asset, therefore increasing it's value.
edit: As you're getting the shop ready yourself and assuming your "tidying the shop up", I'd make notes on what you actually did e.g. plastering, painting etc and maybe even take some before and after photos. That way you can give your Accountant as much insight as possible.
-- Edited by ADAS on Thursday 30th of September 2010 11:47:28 PM
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Tony
Responses are intended as outline only. Formal advice should be sort from your Institutes Technical Department or a suitably qualified Accountant.
Are most sole traders really interested in this? I mean, would most of it not be covered by the Annual Investment Allowance. I would imagine that most sole traders are only interested in accounts because the tax man wants to see them. That's my theory anyway.
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Never buy black socks from a normal shop. They shaft you every time.
What you need to consider is whether you are replaceing/ repairing existing components, or if you are installing new, where none existed before.
For example if you are replacing shelving that already exists, then it is an expense (repairs & renewals), if you are installing additional shelving then that is improvements, which (in theory) add value to your current asset (Fixtures & Fittings) and is a capital expense.
From a bookkeeping/ accounting point of view, it will be a management decision really, as long as consistency is applied.
If you are a sole trader or partnership, it is a different matter for HMRC self assessment, where they give a lot of detail on how an expense should be treated (Revenue or Capital)
HTH
Bill
-- Edited by Wella on Friday 1st of October 2010 10:48:39 AM
What you need to consider is whether you are replaceing/ repairing existing components, or if you are installing new, where none existed before.
For example if you are replacing shelving that already exists, then it is an expense (repairs & renewals), if you are installing additional shelving then that is improvements, which (in theory) add value to your current asset (Fixtures & Fittings) and is a capital expense.
From a bookkeeping/ accounting point of view, it will be a management decision really, as long as consistency is applied.
Hi
This is always how I have viewed this type of expenditure as well
Still trying to learn the basics lol.
