Explain why a business manager needs to understand the difference between capital expenditure and revenue expenditure.

Mark scheme

Marking points from the official mark scheme (May/June 2022). The mark or mark type is shown in brackets.

1. Capital expenditure is money spent on the purchase of fixed assets such as premises and machinery. Items that will be in use for a long period (more than 1 year) which managers must plan for
2. Revenue expenditure is money used to pay for everyday running costs of a business, e.g., raw materials or components, tea or coffee for the canteen or paper for the offices. These items will be used in the short term and, even though lower value, must still be planned for
3. They should normally be funded differently; working capital / retained capital
4. Revenue expenditure recorded correctly allows a manager to accurately measure the cost of the day-to-day running of a business which is vital information in the early days of a business.
5. They are recorded on different financial documents: revenue expenditure is recorded in the Income Statement; capital expenditure is recorded in the Statement of Financial Position – managers use these documents to assess the financial situation of a business