Capital Expenditure Versus Revenue Expenditure

One important audit issue is determining whether expenditure should be recorded as an asset or as an expense.

Type of Expenditure	Accounting Treatment	Example
Capital expenditure	Recorded as PPE	Purchase of a new delivery van
Capital expenditure	Added to the cost of an existing asset	Major upgrade that extends a machine's useful life
Revenue expenditure	Recorded as an expense	Routine servicing of a delivery van
Revenue expenditure	Recorded as an expense	Minor repairs to office furniture

Why Is This Important?

If a company incorrectly records repair expenses as PPE:

• PPE will be overstated.
• Expenses will be understated.
• Profit will be overstated.

Example

A company spends RM4,000 repairing a machine and records it as a PPE addition.

Correct treatment:

Dr Repairs and Maintenance Expense      RM4,000
     Cr Cash or Payables                         RM4,000

Incorrect capitalisation would cause both PPE and profit to be overstated.