Understanding capital and revenue expenditureby
Management accountant and GBBO 2020 contestant Makbul Patel talks through his experiences with capital and revenue.
It’s heating up for our year end. Yes, it’s that time of year again. It’s come around quick. Last year I remember being more stressed about being on Bake Off.
All our management forecast meetings, budgeting, and oh-so important group ‘Teams’ meetings have come down to this - the moment of truth. How accurate were my capital spend projections? Was the constant harassment of other managers worth it? Or should I have just picked a random number, divided it by 100, multiplied it by 78, and added the number of minutes since the first lockdown?
I have a fair idea. Throughout all the year-ends I have continuously worked through, the answer will always be the same: I don’t know. It could be anything. But, that is the beauty of management accounting for me. The whole year is about working towards a result, like an athlete training for the big race or England cricketers practicing for the test (sorry, I shouldn’t have mentioned that one).
The fluid nature of management accounting is what appeals to me. Personality and, to a certain extent, flair can be brought into the equation, rather than straight cold numbers. Interpretation - that’s the word I’m looking for. You can make the number mean anything you want.
It’s like accounting for tabloid journalists. If the year end capital spend is wildly out, there will always be some little gremlin that wasn’t forecast. It’s always down to that one little blighter. But everyone will shrug their shoulders and move on - ah, the summer will finally beckon after the year end. Perfect timing. Even better this year as (hopefully) we will emerge from this dark cave we’ve all been holed up in and walk out shielding our eyes, astonished that we have been set free.
My primary role within accountancy, if you haven’t guessed already, is forecasting housing stock capital expenditure, separating it from the chaff (i.e. revenue expenditure) and hammering out little chips from it called depreciation. Without implicating myself too much for doing a job ‘a trained monkey could do’, I also have to take balanced views on how our company has spent this money and on what asset it should be assigned to. It’s all terribly complicated, trust me.
But no matter how many thousands of lines of expenditure I have seen and classified as either capital or revenue (a new roof on the housing asset is capital, a lick of paint on the door is revenue), I always get into a heated debate when trying to class certain non-tangible spends, such as surveys and consultancy. It always gets me. I can never say with 100% certainty how we should treat it. It’s all dependent on what the weather is doing or how I feel about the latest episode of the Walking Dead (yes, I’m that one person who still watches it).
Whilst studying for my CIMA at Manchester Metropolitan University in the olden days of the 90s, we were very lucky to be taught by a maverick world-weary tutor - always a gnarly look on his face, knowing that he could finally retire after this one last job. He brought with him an exceptional amount of real-life working knowledge. Stanley (don’t worry, just a pseudonym) taught every topic with the intriguing angle of real working life anecdotes. We put our pens down and listened to him at length, following his stories like a soap drama. I learnt more about real life accountancy from him than anyone before or since. I passed the module of course, in case you were wondering.
How is this relevant to capital and revenue? Well, it was Stanley who cemented the definition of capital and revenue into my head. In my previous article, I was on about debits and credits - I related the subject to an analogy of energy neither being created or destroyed. Well, as if by magic, I also have an analogy for capital and revenue - this is what Stanley used.
Imagine a taxi driver. She buys a car and then fills it with petrol. She goes around the town picking up passengers and dropping them off for a fee. The vehicle the taxi driver uses to make a living and generate the revenue stream is capital. The expenditure is petrol. This generates the income stream which is the revenue - a guiding principle.
Which neatly ties into my conundrum for the classification of a non-tangible spend on an asset. For example, a new roof is constructed on a three-bed semi. A consultant is brought in to test the new roof for structural integrity. Technically, this is part of the cost of the roof so personally I would class it as a capital expenditure also. My manager has debated this - their view is that although it’s in relation to the roof it is not something that can be seen or held as part of the structure, so should it not be classed as a revenue cost? Herein lies the grey area where a colourful discussion can ensue. Sometimes you wonder if life is too short and clocking off time is too near. Although, for me, that is one of the attractions of management accounting - personal input has an added value.
Now and again, financial accounting throws up some interesting issues also. For example, the whole Jaffa cake debate. Is it a cake or a biscuit for VAT purposes? HMRC decided in 1991 that it is in fact a cake. The debate ended there.
Many of you will now be concluding period 12 and entering the foreboding time of year end. It is nerve wracking, stressful, and filled with a long list of deadlines. ‘All hands on pumps’, as you will be told constantly. Hopefully, you will have saved your work from last year and all you’ll be doing is changing the dates and tweaking the numbers. If it’s not year-end then life carries on as normal. Whatever you are doing, enjoy your work, get fresh air in your lungs and be happy.