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What is Capital Expenditure? - YouTube
Channel: The Accounting Student
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a company will have different types of
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expenditure
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how will capital expenditure be treated
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in the accounts
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I'm Thomas Harwood and welcome to the
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accounting student where we create a
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free and short videos so that you can
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learn about accounting today's video is
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looking at what is capital expenditure
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all businesses have cash coming in which
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can be known as income and cash going
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out which can be referred to as
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expenditure expenditure can be defined
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as a payment or agreement to make a
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payment which in return a benefit asset
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or service will be received expenditure
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of a business can be a range of anything
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from pain and electricity bill to the
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purchase of a new motor vehicle as it is
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such a variety of expenditure it may be
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useful for a business to categorize them
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into Pacific groups as these will
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perhaps be treated very differently in
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the accounts expenditure can be
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distinguished into two main types and
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they are known as capital expenditure
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and revenue expenditure in this video we
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will look at capital expenditure capital
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expenditure is recognizable when a
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business spends money on fixed assets
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additions to a fixed asset or to gave
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fixed asset in a position ready to be
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used
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additionally capital expenditure can be
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identified if the money is also spent on
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transactions or items such as purchase
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in a fixed asset bringing a fixed asset
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into the business legal costs relating
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to the purchase of the buildings or
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property delivery costs on the machinery
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or motor vehicle sports any necessary
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cost to repair the fixed asset to be in
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a condition for use and finally interest
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incurred on the construction of a fixed
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asset it is very important to understand
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that capital expenditure has no relation
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with the owners capital account capital
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relates to the owners and the owners
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only and capital expenditure relates
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solely to the business also it is vital
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that there is a correct distinction
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between capital and revenue expenditure
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as this is essential to determine a
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correct value for the profit and
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assets of a business let's have a look
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at an example to demonstrate how we
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identify capital expenditure tina runs
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an administration company and when she
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started the business an office was
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bought so that she and other employees
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could work this year in february tina
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started to gain more clients and
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therefore needed more employees to work
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to cope with demand as a result tina has
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society to get an extension on the
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building the business already has so
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there is more space for more employees
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to work in tina wants to know how to
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identify what expenditure the extension
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is in the accounts before she receives
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invoices and receipts relating to the
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extension the first step would be to see
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where for the expenditure is directly
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incurred in bringing the fixed asset
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into use for the first time then it
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would be a capital expenditure in this
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example the building which the extension
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is being added to is already in use so
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is not a capital expenditure in this
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case if however the expenditure improves
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a fixed asset beyond is capability when
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first owned then it can be identified as
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capital expenditure as the extension of
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the building is creating more space for
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Tina's company and therefore an
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opportunity for more employees to work
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this is improving the building's
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capability therefore the cost of the
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extension should be treated as capital
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expenditure
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so that was explanation of what is
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capital expenditure if you enjoyed it
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press the like button if you have a
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