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Unit 3 
Types of Expenditure
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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