Types of Expenditure
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Created on February 17, 2021
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Transcript
Types of Expenditure
Unit 3
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Introduction
Expenditure
Expenditure is money spent by a business and can be split into 2 categories: capital expenditure and revenue expenditure
Capital Expenditure
Revenue Expenditure
Homework
Quiz
What is expenditure?
Introduction
Index
Objectives
01
Identify expenditure
02
Capital Expenditure
03
Revenue Expenditure
04
Quiz
Objectives
Expenditure is money leaving a business Expenditure can be categorised as: Capital expenditure – spending on items that will stay in the business for more than a year e.g. machinery Revenue expenditure – day to day spending to fund the trading activities of the business e.g. inventory
Introduction
1 minute
How many examples of expenditure can you think of for a business?
Capital Expenditure
This is used to buy capital items, which are assets that will stay in the business for a long period of time.
Non-current assets
Capital Expenditure
Non current assets are items owned by a business that will remain in the business for a reasonable period of time. They are shown on a business's statement of financial position (or balance sheet). They are sometimes referred to as 'tangible assets' because they can be touched.
Most fixed assets lose value over time and are therefore depreciated. This means that each year their value on the balance sheet is reduced to give a fair value of the asset.
Read more
Examples of non-current assets: Land and premises Machinery and equipment Vehicles Fixtures and fittings
Intangibles
An intangible asset is something owned by the business that cannot be touched.
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. This increases the value of the business and therefore increases the selling price of the business. A sum of money is added to the value of the business to reflect the value of this goodwill. However, goodwill is difficult to place a figure on - how much would you pay for a recognised brand name?
Capital Expenditure
Goodwill
Read more
A patent is a legal protection of an invention, such as a unique feature of a product or a new process. An entrepreneur or business may patent their idea to stop others from copying the idea. Having a patent allows the business to exploit this in the future by launching an innovative product at a premium selling price. The patent must be worth something, but it's difficult to know how much to value them.
Capital Expenditure
Patents
Info
A feature of a business that is recognised by customers and distinguishes the business from competitors. Customers will link the brand name to expectations based on previous experiences with the brand.
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. Trademarks can be a key influence on consumer choice and build a strong loyalty brand.
Trademarks
Capital Expenditure
Brand Name
Should a business be able to stop a competitor from using a specific colour?Why woud it be important to show a value for these trademarks in a business's accounts?How would you go about attaching a monetary value to these trademarks?
Colour Wars
Capital Expenditure
Revenue Expenditure
Revenue expenditure is spending on day-to-day or regular basis. These are the expenses incurred by a business that are shown on the profit and loss account (also known as statement of comprehensive income).The types of costs incurred vary from business to business. The following pages show a number of examples.
Most businesses providing a good or service will require some inventory e.g. raw materials, finished goods to sell on.
Inventory
The cost of using premises not owned by the business. These are usually monthly payments.
Rent
Rates
Businesses pay rates to the local council for the provision of services, such as rubbish collection and street lighting.
Revenue Expenditure
This covers payments for services such a gas and electricity. The business will receive regular bills, often quarterly for the use of these services.
Heat and light
This payment can be a fixed rate or based on use if a water meter is fitted.
Water
Insurance
Businesses are required to take out a number of insurances:
Revenue Expenditure
Building insurance - to protect the physical building from damage that may be caused by events such as fire Contents insurance - to protect the contents of the building Public liability insurance - to protect people within the building who may be harmed in an accident Employer's liability insurance - to protect the business against any claims for compensation, or legal costs from injuries to employees
This is the paperwork that goes within a business. The costs include postage, printing, stationery and telephone calls.
Administration
The cost to the business includes the gross payment made to the employee, plus National Insurance charges
Salaries
Wages
Wages are paid based on an hourly rate, which allows for greater flexibility for the employee and the business
Revenue Expenditure
Employers in the UK have to, by law, pay a minimum wage to all employees
All the costs associated with attracting the customers, such as adverts, events, point of sale materials.
Marketing
Banks charge businesses for each account and transaction that takes place.
Bank Charges
Interest
If the business has a bank loan or mortgage, it will be charged interest on the amount owed.
Revenue Expenditure
Depreciation
Assets lose value over time. Accountants use depreciation to spread out the cost of an asset over its useful life.
- For example, if a business spends £1m on a new machine, it will not want to treat the whole £1m as an expense in year 1. It therefore depreciates the value of the asset
- Each year as the asset falls in value the depreciation is deducted from profit as an expense
- There are 2 methods of depreciation:
Revenue Expenditure
Straight-Line
Reducing Balance
Straight-line – an asset’s value is reduced by the same amount each year Value of asset – residual value life of the asset Asset purchase price = £300 000 Residual (resell) value = £20 000 Useful life = 5 years £300 000 - £20 000 = £56 000 5 The asset would be depreciated by £56 000 per year Asset Year Depreciation Net book value £300 000 1 £56 000 £244 000 £244 000 2 £56 000 £188 000 £188 000 3 £56 000 £132 000 £132 000 4 £56 000 £76 000 £76 000 5 £56 000 £20 000
Reducing balance – an asset’s value is reduced by a set percentage of the net book value each year Asset purchase price = £300 000 Rate of depreciation = 30% Useful life = 5 years Asset Year Depreciation Net book value £300 000 1 £90 000 £210 000 £210 000 2 £63 000 £147 000 £147 000 3 £44 100 £102 900 £102 900 4 £30 870 £72 030 £72 030 5 £21 609 £50 421* * If the remaining value is higher than the residual value this will be written off in the final year.
Activities
Complete the Quizziz on Types of Expenditure via the link on the classroom
Quiz
Goodwill
Patent
Inventory
Which of the following is not an example of an intangible asset?
Quiz 1/5
Which of the following is an example of capital expenditure?
Mortgage
Heating and lighting
Vehicles
Quiz 2/5
Something you can touch
Something you can't see through
Something you can't touch
What is an intangible asset?
Quiz 3/5
Stepped
Circular
Straight line
Which of the following is a method of depreciation?
Quiz 4/5
Public liability insurance
Employer's liability insurance
Income protection insurance
Which of the following is not a required insurance for a business?
Quiz 5/5
Goodwork!
Quiz
Wrong!
Quiz
Thanks