Types of expenditure

Expenditure is money leaving a business

Expenditure can be categorised as:

Capital expenditure – spending on items that will stay in the business for more than a year e.g. machinery

Revenue expenditure – day to day spending to fund the trading activities of the business e.g. inventory

Non-current assets

Items of value owned by a business that will stay in the business for more than a year

These can be tangible or intangible:

Tangible i.e. you can touch them

Land Buildings and premises Machinery and equipment Vehicles Fixtures and fittings

Intangible i.e. you cannot touch them

Goodwill is when one business buys the reputation, and sometimes customer base, of another established and well recognised business

Patents when a business pays to protect a unique feature of a product or process to stop it being copied by a third party without permission

Trademarks when a business pays to protect a unique characteristic of the business that distinguishes it from competitors.

Examples of trademarks include trademark name, logo, strapline, colour, shape

Brand name when a business buys the right to sell a particular brand of product. A brand is a recognised name that creates a certain expectation in mind of the consumer.

Depreciation is a paper based exercise that spreads the cost of an asset over its useful life

For example, if a business spends £1m on a new machine it will not want to treat the whole £1m as an expense in year 1. It therefore depreciates the value of the asset

Each year as the asset falls in value the depreciation is deducted from profit as an expense

There are 2 methods of depreciation:

Straight-line

Reducing balance