a)    Capital expenditure is expenditure on the purchase or improvement of fixed assets. A fixed asset relates to items purchased (not for resale at a profit) that will be used in the business for more than one accounting year and is of significant monetary value.  It can also include money spent to add value to fixed assets and can include any costs in bringing the assets to their present location and condition. Capital expenditure can include the purchase cost of an asset as well as legal costs, transportation costs and installation costs relating to the asset.  An example of capital expenditure is the purchase and installation of refrigeration equipment in a supermarket.

Revenue expenditure is expenditure which does not increase the value of fixed assets but relates to the operating costs of the business.  Revenue expenditure relates to the day to day running costs of a business.  Examples of revenue expenditure include; rent, insurance, wages and electricity.

b)    Key questions to address when classifying items as ‘capital’ are:

1.    Is the item bought for use in the organisation and not for resale at a profit?

2.    Will it be of use in the organisation, or add benefit, for more than one accounting year?

3.    Is it of significant value?