Difference Between Capital And Revenue Expenditure

This sample essay on Difference Between Capital And Revenue Expenditure provides important aspects of the issue and arguments for and against as well as the needed facts. Read on this essay’s introduction, body paragraphs, and conclusion.

In FF the capital income will come from the investors that own FF(Future Fashion). Investor’s money is used to buy things that will stay in the business for a medium to long period of time – FF’s premises, vehicles or equipment. These are called fixed assets.

When FF sets up a business, Capital Income might also be used to buy opening stock, but as the business develops, stock should be paid for by sales income. The sources of capital income available to business owners are influenced by the type of Business.Sole trader: Sole traders are people who own a business by them self, they will have to find all the capital income for the business on their own by things such as personal loans.

Sole Traders often invest their personal savings into a business or borrow from the bank using their personal assets, such as their house to secure a loan. Sole Traders take a big risk when they do this as they are ultimately responsible for the debts of the business. Being a sole trader can also limit the size of the business but all the profit made from the business can be kept by the sole trader. This would not affect FF; as they are not a sole trader.

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Partnership: Partnerships are when two or more people join together to make a business as partners. Each partner would be expected to contribute towards the capital income, hence increasing the potential amount of money available. Partners will share all decisions made in the business as-well as the profits made. Loans that are taken to start the business are still secured by the partners’ assets, so this is still a high risked operation. This would not affect FF; as they are not a Partnership.Shares: A company is when a business is registered with companies’ house and issues shares to its shareholders. The shareholders and owners of the business will all have to contribute towards the capital income for the business. Shareholders will receive voting rights and the more shares they own, the greater their ability is to influence decision making. Shareholders are rewarded a share of the profits for their investments in the company/business. FF consists of different shareholders who contribute towards the capital income. These shareholders have voting rights and the more shares they own, the greater their ability is to influence decision making. These shareholders are rewarded a share of the profits for their investments in FF.Loans: A loan would be a sum of money that is borrowed to a business or business owners from a bank. The loan will be a lump sum which we then have to be paid back every month at a set amount. Most loans often last five years, although longer loans can be arranged, but these would be longer and charge more interest. When taking a loan the business would have to pay the fixed amount even if they haven’t made a profit. The banks are also not guaranteed to lend money to a business, so the business would have to justify how the money borrowed would be spent and, more importantly, how they can afford and repay it. The bank loan will have to be secured using an asset that belongs to the owners such as a car or house. This means if the business fails to meet payments, the bank can reclaim the asset. FF will not need to loan money from the bank as they have shareholders who generate the capital income for them.Sales: Sales is money that comes in from the sales of goods and services, for example, FF will make money when customers come in and buy products. Sales turnover is therefore determined by the prices charged and the number of customers. Sales can be either cash sales, or credit sales.Rent Received: A business that owns property and charges others for use of all or part of property will receive rent as their main source of income. FF does not rent their buildings so this won’t apply to them.Capital ExpenditureExpenditure is money spent by a business and can be split into two categories; capital expenditure and revenue expenditure. This is used to buy capital items, which are assets that will stay in the business for a long period of time. Capital items are fixed assets and intangible assets, as explained below.Revenue IncomeRevenue Income is the money that comes into the business from performing its day-to-day function which would be selling goods or providing a service. The nature of the revenue income depends on the activities that the business does to bring in money, sources of that can be; sales, rent received, commission receivedTrademarks: A trademark is a symbol, logo, brand name, words or even colour that sets apart one business’s goods or services from those of its competitors. FF’s logo is a key influence because it is very well known and can build brand loyalty.Commission Received: A business may sell products and services as an agent of another business. This will mean that they sell other business products on their behalf and for each sale they make a small percentage of the sale. This percentage is called commission.Fixed AssetsFixed assets are items owned by a business that will remain in the business for a reasonable period of time. These are shown on a business’s balance sheet and include land and buildings, office equipment, machinery, furniture and fittings, and motor vehicles. These are sometimes referred to as ‘tangible assets’ because they can be touched.Most fixed assets will lose value over time and for this reason they are depreciated. This means that each year their value in the balance sheet is reduced in order to give fair value of the asset.IntangibleAn intangible asset is something owned by the business, that cannot be touched but adds value to the business. Intangibles that exist within businesses.Goodwill: When you buy an existing business, its name and reputation will already be known and it may already have an established customer base or set of clients. FF do not use good will as they will open up their own new stores.Patents: A patent is the legal protection of an invention, such as a unique feature of a product or a new process. This means that FF can patent their products which are unique from other people’s products; which will mean that people cannot copy the idea.Revenue ExpenditureRevenue Expenditure is when you spend money on a day-to-day basis. These are the expenses incurred by a business that are shown on the profit and loss account. These types of costs incurred vary from different businesses, some on the common types include:* Administrative costs – In FF, administrative charges are for things like postage, printing and stationary, which might include items such as business cards, headed paper and order books* Staff costs – Staff costs is the money FF will spend on their employees, FF must pay all their employees for the work that they do. FF must pay Salaries, Wages, Insurance, Pensions and for any Training required.* Selling and distribution costs – If FF is to survive it must make enough sales to cover all its costs. It must be able to attract customers to come and use their products and services. There are two crucial functions that carry additional costs. Selling and distribution costs include: Sales Staff Salaries – Many businesses will employ workers with specific responsibility for sales. This might be a sales representative who travels around trying to generate sales, sales assistances who help the customer or accounts managers who look after regular customers. Sales staff receive a commission-based salary, meaning the more they sell, the more they can earn.Carriage of sales – This is the cost FF must pay of getting the sale to the customer and can range from something as simple as an envelope and a stamp or courier delivery to something much more complex with bulky or fragile products or even products being shipped to another country. Some business might make the customers pay this charge by quoting a sales price plus postage and packing costs. Marketing – This covers a whole range of costs for FF associated with attracting the customer and convincing them to make a purchase. Possible marketing costs might include advertisements, promotional literature, promotional events, point of sale materials and so on.* Finance costs – FF do not operate on a cash-only basis – they are likely to accept payments by cheque, card or direct bank transfer. They are likely to make payments in the same way. This means FF must have a bank account. Banks are also businesses and they too want to make a profit so they charge for their services. Finance costs to a business can include Bank charges (business charge for every transaction made) and Loan and mortgage interest (Banks charge interest on loans and Mortgage)* Purchase of stock – FF will require stock as they are providing goods and services. When FF is first started up it is likely to buy stock with cash as it will not have built a reputation, but then when it gets more well known it may be able to buy stock in credit which FF can do now. Bigger and more established business may be able to drive the cost of stock when buying in larger quantities, there are other costs related to stock such as insurance and storage costs.