Capital Expenditure That Is Mistakenly Recorded As a Revenue Expenditure

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All organizations, including government agencies, set procedures to monitor revenue collection and the way bookkeepers record operating income. They also establish adequate policies for expense recording, matching revenues with expenses to produce accurate financial statements. Record-keeping policies and procedures ensure that a bookkeeper sets revenue expenditures apart from capital expenditures.

Capital Expenditure

  • A capital expenditure is money a business spends to acquire a long-term asset or extend the operating life of a fixed asset. Economists use the terms "useful life" and "operating life" interchangeably. Capital expenditure, fixed asset, long-term resource and tangible asset are synonyms. Here the focus is on the time frame over which the company will benefit from the expense. Capital expenditures include the purchase of production equipment or a major improvement to a factory's technologically defective wing. Capital expenditures also apply to large, long-term initiatives that government officials spearhead to build or renovate pieces of infrastructure, such as roads and bridges.

Revenue Expenditure

  • The term "revenue expenditure" is technically inaccurate; the correct term is "operating expenditure." This is cash an organization spends to generate revenues and pave the way for future financial success. Operating expenses include everything the business does to maintain a good marketplace reputation, attract more customers than the competition, design and sell top-quality products and abide by regulatory guidelines and industry norms. Operating expenditures include rent, office supplies, legal costs and interest. They also include charges a company incurs to produce and store raw materials, work-in-process items and completely finished merchandise.

Explanation

  • To understand what happens if a corporate bookkeeper mistakenly records a capital expenditure as an operating expenditure, it's useful to learn about the correct entries for each scenario. It's also important to remember that crediting cash, an asset account, means reducing company funds -- unlike in the banking sector.

    To record a capital expenditure, the bookkeeper debits the corresponding asset account and credits the cash account. This entry increases corporate long-term assets. To record an operating expenditure, the junior accountant debits the corresponding expense account and credits the cash account. This entry increases corporate expenses and reduces net income. Now that entries for both scenarios are clear, it's easier to see what would happen in the event of a mismatch or inaccurate recording. If a bookkeeper inaccurately records a capital expenditure as an operating charge, the junior accountant essentially would overestimate corporate expenses and underestimate long-term assets.

Financial Reporting

  • Journal entries relating to capital and operating expenditures directly flow through a balance sheet and a statement of profit and loss, respectively. They indirectly affect a statement of cash flows and a statement of retained earnings.

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