C3 Types of expenditure
• Capital expenditure:
o non-current assets – tangible (land, buildings and premises, machinery and equipment, vehicles, fixtures and fittings)
o intangible (goodwill, patents, trademarks, brand names).
• Revenue expenditure:
o inventory
o rent
o rates
o heating and lighting
o water
o insurance
o administration
o telephone
o postage
o stationery
o salaries
o wages
o marketing
o bank charges
o interest paid
o straight-line depreciation
o reducing balance depreciation
o discount allowed.
Kagan Mix Pair Share
For a business you frequently use make a list of all of the possible costs they might incur on a monthly basis.
Which of the costs might a business be able to reduce if it runs into difficulty?
What factors might cause costs to rise?
Expenditure is the money spent by a business. It can be split into two categories: capital expenditure and revenue expenditure.
Capital expenditure is used to buy capital items, which are assets that will stay in the business for a long time. Capital items are non-current assets (expected to last more than a year) and tangible assets. Examples include property, machinery vehicles etc...
Revenue expenditure is spending on items on a day- to-day or regular basis which cover short-term expenses. These are usually used within a year.
These are the expenses incurred by a business that are shown on the profit and loss account known also as a statement of comprehensive income).
These assets will remain in the business for a reasonable period of time( More than a year). These are shown on a business's statement of financial position (balance sheet) and include land and premises, machinery and equipment, vehicles, and fixtures and fittings. These are often referred to as tangible assets as they are physical items which can be touched. Most of these assets will depreciate (lose value over time) and so their value changes each year on the balance sheet.
This is a term used to describe assets the business has which cannot be touched but adds value to the business. The following 4 intangible items exist within businesses.
1.Goodwill: The name and reputation of a business as well as customer base, can be hard to value.
2.Patents: A legal protection of an invention such as a unique feature of a product or new process.
3.Trademarks: A symbol, logo or brand name used to distinguish products from it's competitors.
4.Brand name: A feature of a company that is recognised by customers and distinguishes the business from it's competitors.
The mark scheme also suggests digital items such as websites are also examples of intangible assets.
Most businesses providing a good or service will require some sort of inventory, whether it is raw materials, finished goods to sell on or supplies they use to provide the service. Large companies may buy in bulk to drive the cost of inventory down and with a good relationship with a supplier the inventory may be purchased on credit and paid for at a later date. This helps to improve their cashflow.
This is the cost of using premises not owned by the business. These are regular payments, usually monthly, for the use of the premises.
Businesses have to pay non-domestic rates to the local council. This is a sum of money which goes towards services such as refuse collection and streetlights. It is not a fixed amount but is calculated by the council based on the size and location of the premises and nature of the business.
This covers payment for services such as gas and electricity. The business will receive regular bills, often quarterly for the provision and use of these services. These are usually paid in arrears which mean they are paid for after they are used.
This involves payment for the supply of water to premises and use of water. This can be a fixed rate or based upon usage if a meter is fitted.
A business is legally required to take out a number of types of insurance to protect itself from the possibility of serious losses. These include:
Buildings Insurance: To protect the physical building from damage
Contents Insurance: To protect what is inside the building (Fixtures and fittings, stock, machinery)
Public Liability Insurance: To protect people who are within the buildings from accidents
Employer's liability Insurance: To protect against emloyee claims should an employee be injured at work
This refers to the paperwork that goes on in a business and can be internal or external. Costs include things such as stamps, envelopes, stationery and printing. Telephone charges are also classed as an administrative cost and are slightly unusual from an accounting point of view. They are two separate charges one for the line rental (paid in advance) and one for the usage (paid after). These are usually charged quarterly.
This is the annual figure paid to an employee, usually paid in 12 monthly installments. The employee will also have to pay tax, national insurance and possibly pension contributions so will receive a smaller take home wage. Employers also have to pay an employer's national insurance meaning they pay more than the actual salary.
A wage is an hourly rate paid to an employee, meaning there is a direct link between hours worked and pay. This allows greater flexibility for both the employer and the employee but also uncertainty. Many student and part-time jobs operate in this way.
This covers a whole range of costs associated with attracting the customer and convincing them to make a purchase. Advertisements, promotional literature, events and point of sales are all included in marketing. Although this is a cost it can bring an increase in trade which may repay the initial cost and potentially even bring in more in terms of revenue.
Personal bank accounts are generally free although businesses get charged for each transaction. Often banks will offer free banking for a year to attract new business customers.
If a company has a bank loan or mortgage, then interest will be charged on this. Preferential rates are often offered to big businesses. Big businesses will carry out a lot of transactions and pay high charges. So for the bank it may be worth offering them lower interest rates in the long term just to keep their custom.
Assets lose value over time. Accountants use depreciation to spread out the cost of an asset over its useful life. Depreciation is a paper exercise to match the cost of an asset against the time it is used within a business. For example if a machine costs £50,000 and is expected to last 5 years, this would not be shown as a one-off expense in the accounts but a £10,000 expense each year. There are two different types of depreciation.
Straight line depreciation: The asset is depreciated by a set amount each year.
Reducing balance depreciation: An asset is depreciated by a set percentage of it's remaining value each year.
These are explained in more detail in section F1.
Reductions offered to customers are an expense to a business as it reduces the amount of cash flowing into the business. Discounts may be allowed to attract customers, for bulk purchases or to gain a competitive advantage. These help to build good relationships with customers and develop loyalty to a business's most important customers.