management Back Forwards
The Profit & Loss account
 

If the company continues to pay in the same manner for the next eleven months the balance on the rent account will show the value of assets (cash) used up by the company during the year in exchange for the use of its premises. Revenue expenditure is the amount of asset values used up in this way during the year to support the company's normal operational activities.

Capital Expenditure

The situation is slightly different where the company purchases an asset that will not be used up (becoming an expense) within the current year, but will remain as an asset (capable of providing future financial benefits) at the end of the year. Expenditure to purchase a fixed asset such as a vehicle, which will continue to offer financial benefits to the company for several years, is classified as capital expenditure.

 

Provision for Depreciation

However, even fixed assets (except perhaps land) will not remain of value to the company forever. Their value as assets is gradually used up until they are disposed of by the company (sold or scrapped). Where an asset has lost value or been partially used up during a year's operations the accountant can make allowance (provision) for this decline in value of the asset by writing down (or amortising) the asset's original cost by an amount reflecting the share of the useful life of the asset used up in the current year's operations. this amount is like revenue expenditure, in the sense that it reflects the using up of an asset, but unlike revenue expenditure, it is merely an accounting adjustment - not a real transaction that involves cash expenditure.