## **Learning Outcomes**

After reading this article, you will be able to classify spending as capital or revenue expenditure and explain how that choice affects profit and assets. You will be able to record typical transactions in the general ledger using double-entry, including simple sales tax treatment where relevant. You will also be able to prepare and update basic asset register entries that match what has been posted to the ledger.

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

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

- how to distinguish between capital expenditure and revenue expenditure
- how classification affects the statement of financial position and statement of profit or loss
- how to record purchases of non-current assets using double-entry bookkeeping
- how to account for sales tax on purchases of non-current assets (where applicable)
- what an asset register is and how it links to general ledger postings
- how to treat subsequent expenditure on non-current assets (repair vs improvement)

## **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 of the following is most likely to be **capital expenditure**?
   - A. Annual service of a delivery van
   - B. Replacement of worn brake pads to restore normal performance
   - C. Purchase of a new photocopier for office use
   - D. Office cleaning costs

2. True or false? A sales tax registered business records a non-current asset at the **gross** amount paid (including sales tax).

3. A business buys a computer on credit for \$1,200 plus sales tax at 20%. Which double entry is correct (ignoring any trade discounts)?
   - A. Dr Computer equipment \$1,440; Cr Payables \$1,440
   - B. Dr Computer equipment \$1,200; Dr Input tax \$240; Cr Payables \$1,440
   - C. Dr Input tax \$240; Cr Computer equipment \$240; Dr Payables \$1,200
   - D. Dr Repairs expense \$1,200; Dr Input tax \$240; Cr Payables \$1,440

4. True or false? If later spending increases an asset’s capacity beyond its original standard, it is normally treated as revenue expenditure.

5. State **two** items of information (other than cost) that you would usually record in an asset register.

## **Introduction**

In FA1, you record transactions so that income, expenses, assets, liabilities and capital are correctly stated. One common exam area is deciding whether spending should be recorded as an asset (capital expenditure) or as an expense (revenue expenditure).

That decision matters because it changes profit for the period and it changes what appears in the statement of financial position. You also need to keep clear records of the assets a business owns, and a simple asset register is often used alongside the general ledger for control.

## Capital vs revenue expenditure: what you are deciding

Businesses spend money on many items: some items support day-to-day trading, while others are long-term resources used over several periods. Your first task is to decide what the spending relates to before you post the double entry.

> **Key Term: non-current asset**
> An item bought for use in the business over more than one accounting period (for example, equipment, vehicles, or fixtures).
>
> **Key Term: capital expenditure**
> Spending to buy a non-current asset, or to improve an existing non-current asset beyond its original standard, so that benefits are expected over more than one period.
>
> **Key Term: revenue expenditure**
> Spending on day-to-day running costs or on maintaining an asset in its current condition; it is charged as an expense in the period.

### A quick decision rule you can apply in FA1

Ask two questions:

1. **Does the spending create a new non-current asset?**  
   If yes, it is usually capital expenditure.

2. **If it is on an existing asset, does it improve the asset beyond its original condition?**  
   If yes, it is usually capital expenditure. If it only restores or maintains normal working condition, it is usually revenue expenditure.

## Why classification matters in bookkeeping

Capital expenditure is recorded as an **asset** in the statement of financial position, so it does not reduce profit at the date of purchase. Revenue expenditure is recorded as an **expense** in the statement of profit or loss, so it reduces profit for the period.

This also links to the accounting equation. If you treat spending as a revenue expense, you reduce capital through reduced profit. If you treat spending as capital, you increase non-current assets instead.

### **Exam Warning**

A common error is to treat any “large” amount as capital. Size does not decide the treatment. The deciding factor is whether the spending creates a long-term resource or improves one beyond its original standard.

## Recording capital and revenue expenditure in the general ledger

In FA1 you record transactions using double-entry bookkeeping. The account you debit depends on whether you have bought an asset or incurred an expense.

### Capital expenditure: typical double entries

If you buy a non-current asset and pay immediately:

- Debit Non-current asset (for example, Equipment)
- Credit Cash at bank

If you buy on credit:

- Debit Non-current asset
- Credit Payables

### Revenue expenditure: typical double entries

If you pay an expense immediately:

- Debit Expense (for example, Repairs, Motor expenses, Rent)
- Credit Cash at bank

If you incur the expense on credit:

- Debit Expense
- Credit Payables

## Sales tax and the cost of an asset (FA1 level)

If a business is registered for sales tax, it usually records:

- the **asset at the net amount** (excluding sales tax), and
- the sales tax as **input tax** (a separate asset/receivable from the tax authority).

If the business is **not** registered, it cannot reclaim sales tax, so the sales tax is normally included in the cost of the asset (or the expense).

You may need these calculations:
$$\text{Sales tax} = \text{Net} \times \text{tax rate}$$

If you are given a gross figure:
$$\text{Net} = \frac{\text{Gross}}{1 + \text{tax rate}}$$

## Simple asset register entries (what to write and why)

The general ledger shows totals by account (for example, total equipment cost). An asset register is a separate listing that identifies the individual assets that make up that total.

> **Key Term: asset register**
> A list of a business’s non-current assets showing details such as description, purchase date, cost and location. It supports control and record keeping alongside the general ledger.

### What a basic asset register line should include

A simple register entry often contains:

- Asset ID / reference number
- Asset description (make/model)
- Purchase date
- Supplier name and invoice reference
- Location / department / user
- Cost (net of recoverable sales tax)
- Notes (serial number, warranty end date)

Many businesses also record depreciation information, but in FA1 you are often tested more on correct classification and correct posting.

### Keeping the register consistent with the ledger

A useful check is:

- The sum of costs in the asset register for “Equipment” should match (or reconcile to) the balance on the “Equipment” general ledger account.

## Subsequent expenditure: repair or improvement?

Spending after an asset is bought is called subsequent expenditure. You still need to decide whether it is capital or revenue.

> **Key Term: subsequent expenditure**
> Spending incurred after an asset has been acquired, such as servicing, repairs, replacement parts or upgrades.

### Usually revenue expenditure (expense)

Revenue expenditure normally includes:

- servicing and maintenance (oil changes, annual services)
- repairs that restore an asset to normal working order
- replacement of worn parts with similar parts (no performance improvement)

**Ledger posting:** Debit Repairs (or similar expense); credit Bank/Payables.  
**Asset register:** Usually no change to cost, but you may add a note (for example, service date).

### Usually capital expenditure (asset)

Capital expenditure usually includes:

- upgrades that increase capacity/output or efficiency beyond the original standard
- additions that extend the asset’s useful life beyond what was first expected
- major improvements that change the asset’s use or performance

**Ledger posting:** Debit the relevant non-current asset account; credit Bank/Payables (and input tax where relevant).  
**Asset register:** Increase the asset’s recorded cost (or create a new component line if the register uses components).

### **Revision Tip**

Use the wording: **“restore” = revenue** and **“improve beyond original” = capital**. Exam questions often use these exact ideas even if the amounts change.

## Worked Examples

### **Worked Example 1.1**

A sales tax registered business buys a delivery van for \$12,000 plus delivery costs of \$300. Sales tax is charged at 20% on both items. The supplier invoice is paid immediately by bank transfer.

Required:

1. Calculate the net cost, input tax and total paid.
2. Record the double entry.
3. Show a simple asset register entry (one line).

> **Answer:**
>
> 1. Net cost of van (including delivery)
>    $$
>    = 12,000 + 300 = 12,300
>    $$
>    Input tax
>    $$
>    = 12,300 \times 20\% = 2,460
>    $$
>    Total paid
>    $$
>    = 12,300 + 2,460 = 14,760
>    $$
> 2. General ledger entry:  
>    Dr Motor vehicles (non-current asset) \$12,300  
>    Dr Input tax \$2,460  
>    Cr Cash at bank \$14,760
> 3. Asset register (example):
>
> | Asset ID | Asset description         | Date bought | Supplier / invoice   | Location | Cost (net) |
> | -------- | ------------------------- | ----------- | -------------------- | -------- | ---------: |
> | MV-014   | Delivery van (make/model) | 15 Dec 20X5 | Speed Motors INV8841 | Depot 1  |     12,300 |

### **Worked Example 1.2**

A business already owns a machine. During the year it pays:

- \$360 for a replacement component that restores the machine to its normal level of efficiency (no improvement), and
- \$900 for an upgrade kit that increases the machine’s output beyond its original standard.

The business is not registered for sales tax. Both invoices are paid by bank.

Required:  
Classify each item as capital or revenue, show the ledger entries, and state what happens to the asset register.

> **Answer:**
>
> - \$360 replacement component: **revenue expenditure** (it restores normal performance).  
>   Dr Repairs and maintenance (expense) \$360  
>   Cr Cash at bank \$360  
>   Asset register: no increase in cost (you may add a note for record keeping).
> - \$900 upgrade kit: **capital expenditure** (it improves output beyond original standard).  
>   Dr Plant and equipment (non-current asset) \$900  
>   Cr Cash at bank \$900  
>   Asset register: increase the machine’s recorded cost by \$900 (or add a separate line linked to the same machine, depending on the register format).

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- capital expenditure is recorded as a non-current asset, not an expense
- revenue expenditure is charged as an expense in the period
- classification affects profit and the statement of financial position
- capital purchases are posted Dr non-current asset; Cr bank/payables
- revenue costs are posted Dr expense; Cr bank/payables
- sales tax registered businesses usually record assets at net cost and post input tax separately
- an asset register lists individual assets and should match the general ledger control totals
- subsequent expenditure is revenue if it restores normal condition, but capital if it improves beyond original standard

## **Key Terms and Concepts**

- non-current asset
- capital expenditure
- revenue expenditure
- asset register
- subsequent expenditure


Capital and revenue expenditure basics - Simple asset register entries