## **Learning Outcomes**

After reading this article, you will be able to classify spending as capital or revenue expenditure and explain the effect on profit and assets. You will be able to record non-current asset acquisitions (cash or credit) using double-entry bookkeeping, including sales tax where relevant. You will also be able to record disposals of non-current assets, calculate any profit or loss on disposal, and present the entries as clear journal entries suitable for FA1 exam questions.

## **ACCA Recording Financial Transactions (FA1) Syllabus**

For ACCA Recording Financial Transactions (FA1), you must understand:

- how to distinguish capital expenditure from revenue expenditure and choose the correct ledger accounts
- how to record non-current asset acquisitions paid in cash or on credit using double entry
- how to account for sales tax (input tax and output tax) on purchases and sales, including non-current assets
- how and why journals are used for non-routine transactions such as disposals of non-current assets
- how to calculate and record profit or loss on disposal of a non-current asset

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. Which item is most likely to be **capital expenditure**?
   - A. Annual servicing of an existing delivery van
   - B. Staff training on how to use a new machine
   - C. Delivery and installation of a new machine purchased for long-term use
   - D. Cleaning materials used in the office

2. True or false? Spending on repairs that only keep an asset working (without increasing its performance or life) is capital expenditure.

3. A business buys equipment for \$6,000 plus sales tax at 20%, on credit. Which journal correctly records the purchase (ignore trade discounts)?
   - A. Dr Equipment \$7,200; Cr Payables \$7,200
   - B. Dr Equipment \$6,000; Dr Input tax \$1,200; Cr Payables \$7,200
   - C. Dr Purchases \$6,000; Dr Input tax \$1,200; Cr Payables \$7,200
   - D. Dr Equipment \$6,000; Cr Payables \$6,000; Cr Output tax \$1,200

4. A non-current asset has a carrying amount of \$2,500 and is sold for \$3,000 (no sales tax). What is the profit or loss on disposal?
   - A. Loss \$500
   - B. Profit \$500
   - C. Loss \$2,500
   - D. Profit \$2,500

5. State two costs (other than the list price) that are commonly included in the acquisition cost of a non-current asset.

## **Introduction**

In FA1 you record business transactions in ledger accounts using double entry. One common area where students lose marks is classifying spending incorrectly: recording a long-term asset purchase as an expense, or recording day-to-day running costs as an asset.

This topic also links to journals. Purchases of equipment and disposals of non-current assets happen less often than sales and purchases of inventory, so they are often recorded using a journal entry. In the exam, you may be asked for the correct journal, the correct ledger postings, or both.

## **1. Capital vs revenue expenditure: the basic split**

The main question is: does the spending create or improve a resource that will help the business earn income over more than one accounting period, or is it a day-to-day cost of running the business?

> **Key Term: capital expenditure**
> Spending that purchases a non-current asset or improves an existing non-current asset, so the business expects benefits over more than one accounting period.
>
> **Key Term: revenue expenditure**
> Spending on routine operations or maintenance that is used up in the current period (or only keeps an asset in its current condition). It is recorded as an expense.

### What does the classification change?

- **Capital expenditure** is recorded in a **non-current asset** ledger account and shown in the statement of financial position.
- **Revenue expenditure** is recorded in an **expense** ledger account and shown in the statement of profit or loss.

> **Key Term: non-current asset**
> An asset bought for long-term use in the business (normally more than 12 months), not for resale in the normal course of trade.

### Quick decision rules you can use in FA1

Capital expenditure is likely when spending:

- buys a new long-term asset (vehicle, equipment, fixtures)
- increases an asset’s capacity, performance, or useful life
- is necessary to get a new asset ready for use (for example, delivery and installation)

Revenue expenditure is likely when spending:

- relates to repairs and maintenance that keep an asset working
- is a recurring running cost (rent, electricity, insurance, wages)
- is consumed quickly (stationery, cleaning materials)

> **Key Term: capitalise**
> To record a cost as part of a non-current asset (instead of recording it as an expense).

## **2. Recording acquisitions of non-current assets**

When you acquire a non-current asset, you record:

- the **asset cost** (debit)
- the **payment method** (credit bank) or the **amount owed** (credit payables)
- any **sales tax** separately, if the business is registered and can reclaim it

> **Key Term: acquisition cost**
> The amount recorded for a non-current asset at purchase: purchase price (after trade discounts) plus costs needed to bring the asset to the location and condition required for use, excluding recoverable sales tax.

### Sales tax on acquisitions

If sales tax applies and is reclaimable:

- sales tax on purchases is **input tax** (an asset/receivable)
- the supplier is owed the **gross** amount (net + tax)

> **Key Term: input tax**
> Sales tax charged by suppliers on purchases that a sales-tax-registered business can usually reclaim from the tax authority.
>
> **Key Term: output tax**
> Sales tax charged to customers on sales, collected by the business on behalf of the tax authority.

### Double entry patterns to learn

1. Bought for cash/bank
   - Dr Non-current asset (net)
   - Dr Input tax (if applicable)
   - Cr Bank (gross)

2. Bought on credit
   - Dr Non-current asset (net)
   - Dr Input tax (if applicable)
   - Cr Payables (gross)

### **Worked Example 1.1**

A business buys a machine for long-term use. Details from the supplier invoice:

- Machine list price \$10,000 less trade discount 10%
- Delivery and installation \$600
- Staff training on how to use the machine \$300  
  Sales tax is 20% on all items. The invoice is on credit.

Required: classify the spending and record the journal entry.

> **Answer:**
>
> **Classification (net of sales tax):**
>
> - Machine: \$10,000 × 90% = \$9,000 (capital)
> - Delivery and installation: \$600 (capital)
> - Training: \$300 (revenue)
>
> **Input tax:**
>
> - Total net spend = \$9,000 + \$600 + \$300 = \$9,900
> - Input tax = \$9,900 × 20% = \$1,980
> - Total payable (gross) = \$9,900 + \$1,980 = \$11,880
>
> **Journal (on invoice date):**
>
> - Dr Plant and machinery (asset) \$9,600
> - Dr Training expense \$300
> - Dr Input tax \$1,980
> - Cr Payables \$11,880

### **Exam Warning**

Do not include **staff training** or **routine maintenance** in the asset cost. Also, do not record the gross amount (including sales tax) in the asset account if input tax is reclaimable.

## **3. Recording disposals of non-current assets**

A disposal happens when a business removes a non-current asset from use, often by selling it. Disposals are commonly tested using journals.

> **Key Term: disposal**
> The sale, scrapping, or other removal of a non-current asset from the business.

### What you must record on a disposal

You usually need to:

1. record the **proceeds received** (bank/cash or receivable)
2. record any **output tax** on the sale (if sales tax applies)
3. remove the asset from the books
4. calculate and record any profit or loss on disposal

> **Key Term: carrying amount**
> The book value of an asset at a point in time. If depreciation is used, carrying amount is:
>
> $$
> cost - accumulated\ depreciation
> $$

### Profit or loss on disposal (basic rule)

Use the net proceeds (excluding sales tax) compared with the carrying amount:
$$\text{Profit or loss on disposal} = \text{Proceeds (net)} - \text{Carrying amount}$$

> **Key Term: profit or loss on disposal**
> The difference between disposal proceeds (net of sales tax) and the asset’s carrying amount; profit increases income and loss increases expenses.

### Using a disposal account (common exam approach)

Many exam questions use a **disposal account** to collect the figures and show the calculation clearly.

> **Key Term: disposal account**
> A temporary ledger account used to record an asset’s cost, accumulated depreciation (if given), and disposal proceeds, so the profit or loss can be determined.

Typical steps (when cost and accumulated depreciation are both given):

- Transfer **cost** to the disposal account
- Transfer **accumulated depreciation** to the disposal account
- Record **proceeds** (and output tax)
- Transfer the balancing profit/loss to profit or loss

### **Worked Example 1.2**

A business sells equipment for \$3,000 plus sales tax at 20%. The buyer pays immediately by bank transfer. The equipment being sold has:

- Cost \$10,000
- Accumulated depreciation \$7,500

Required: record the disposal using a disposal account and calculate the profit or loss.

> **Answer:**
>
> **Step 1: Transfer the asset cost to the disposal account**
>
> - Dr Disposal account \$10,000
> - Cr Equipment (cost) \$10,000
>
> **Step 2: Transfer accumulated depreciation**
>
> - Dr Accumulated depreciation \$7,500
> - Cr Disposal account \$7,500
>
> **Step 3: Record proceeds and output tax**
>
> - Bank received (gross) = \$3,000 + (\$3,000 × 20%) = \$3,600  
>   Journal:
> - Dr Bank \$3,600
> - Cr Disposal account \$3,000
> - Cr Output tax \$600
>
> **Step 4: Find profit or loss on the disposal account**
>
> - Disposal account credits: \$7,500 + \$3,000 = \$10,500
> - Disposal account debits: \$10,000
> - Credit balance = profit \$500
>
> **Step 5: Transfer profit to profit or loss**
>
> - Dr Disposal account \$500
> - Cr Profit on disposal (income) \$500

### **Exam Warning**

Do not post disposal proceeds to the **Sales** account. Sales is for normal trading income; disposal proceeds are recorded separately as “profit/loss on disposal” (and output tax if applicable).

### **Revision Tip**

When stuck, write down the account types first (asset, liability, income, expense). Then apply the rule: increases in assets/expenses are debits; increases in liabilities/income are credits.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- how to distinguish capital expenditure from revenue expenditure using practical decision rules
- how classification affects the statement of profit or loss and statement of financial position
- what costs are normally included in a non-current asset’s acquisition cost
- how to record non-current asset acquisitions on cash terms and on credit terms
- how to record input tax on asset purchases where sales tax is reclaimable
- how to record disposals, including output tax where relevant
- how to calculate and record profit or loss on disposal, including use of a disposal account

## **Key Terms and Concepts**

- capital expenditure
- revenue expenditure
- non-current asset
- capitalise
- acquisition cost
- input tax
- output tax
- disposal
- carrying amount
- disposal account
- profit or loss on disposal


Capital and revenue expenditure basics - Recording acquisitions and disposals