All expenditure is described as either revenue or cost.
Revenue expenditure refers to expenditure incurred on day-to-day activities like administration, advertising, raw materials and salaries. it’s charged right away within the profit and loss account consistent with the period to which it relates.
By contrast, cost refers to expenditure on longer-term (more than one year) purposes like investments in plant and machinery and joint ventures. Such expenditure is ‘capitalized’ within the record and depreciated over its estimated commercial life in keeping with the method of depreciation.
There are some ‘grey’ areas which make the excellence between revenue expenditure and cost difficult to see.
One of the classic examples is maintenance. If maintenance is defined as revenue expenditure, there’s a right away ‘hit’ to the profit and loss account. If, however, it’s defined as cost the impact are touch several financial periods. Although the excellence is very important for the needs of calculating profit, it’s not relevant from the purpose of view of money. That needs to be spent no matter whether the prices involved are revenue or capital items!
When goods are manufactured or purchased for resale, they’re rarely all sold within the same financial period. this provides rise, therefore, to stocks at the tip of 1 financial period and therefore the start of another. As we’ve seen, a basics of the profit and loss account is that revenues or sales must be matched with the price of these same sales.
Manufacturing companies like British Aerospace and General Electric of North America won’t just have stocks of finished goods but also raw materials and partly finished goods which are called ‘work in progress’. Opening and shutting stocks for these things are adjusted in a very similar thanks to that shown for Atherton Ltd when manufacturing costs are calculated for a financial period.
Corporation tax is that the system which applies to the profits of all limited companies.
The IR doesn’t recognize the charge disclosed by an organization in its profit and loss account irrespective of which depreciation method is employed. this is often because the Revenue has its own system of tax allowances which acts as a substitute for depreciation.
There is one standard rate of corporation tax. Currently, it’s 31 per cent but it’ll be reduced to 30 per cent with effect from April 1999.
Small and medium-sized companies, defined as those with taxable profits of but £1.5 million p.a., pay corporation tax at a reduced rate. the present minimum rate is 21 per cent which is able to be lowered to twenty per cent from April 1999. The profit on which corporation tax is levied isn’t the identical because the profit before taxation disclosed within the profit and loss account. Instead, it’s an adjusted figure after some costs are disallowed and capital allowances utilized in place of the charge. For this reason, companies cannot manipulate their tax charge by changing depreciation policy.
We have just mentioned a provision for deferred taxation. A provision is comparable to an accrued charge. The difference is that whereas an accrued charge like an unpaid invoice is understood very accurately, a provision isn’t. It refers to a future liability which is predicted to occur, but the quantity and, possibly, the date of payment are uncertain.
Quite aside from deferred taxation, there are different kinds of long term provisions. for instance, within the year to the tip of March 1998, Marks & Spencer disclosed a provision of nearly £28m for post-retirement health benefits. it’s a commitment to pay insurance premiums to a number of its retired employees. variety of companies like Reckitt and Colman have also made large provisions for ‘Year 2000’ costs.