Edexcel International A Level Accounting: Capital and revenue expenditure and non-current asset depreciation (YAC11)

This guide covers outcomes 1.1.11 to 1.1.20 of the Pearson Edexcel International Advanced Subsidiary/Advanced Level in Accounting (XAC11/YAC11) specification, Issue 2, September 2018. They sit in Unit 1, topic 1.1, which is the International AS unit. The businesses and figures are invented, and all amounts are in dollars. The wider overview is Principles and double entry bookkeeping; this guide goes deeper on its last two headings. For quick recall use the revision notes, then try the practice questions. The course hub is Edexcel A-Level Accounting, the printable list is the checklist, and the free diagnostics show where to start.

What the specification lists

Outcome	What you must be able to do
1.1.11	Distinguish capital expenditure from revenue expenditure
1.1.12	Apply the correct treatment of each, with reference to relevant accounting concepts
1.1.13	Explain the causes of depreciation
1.1.14	Explain the reasons for charging depreciation
1.1.15	Calculate depreciation by reducing balance, straight line and revaluation methods
1.1.16	Write up non-current asset and provision for depreciation ledger accounts
1.1.17	Show the effect on profit of different depreciation methods
1.1.18	Show the effect on profit of a change of method
1.1.19	Prepare disposal accounts
1.1.20	Prepare a schedule of non-current assets

The specification says calculators may be used in Unit 1.

Capital and revenue expenditure (1.1.11 and 1.1.12)

Capital expenditure buys, or improves the earning capacity of, a non-current asset. It is recorded in the statement of financial position at cost and then written off over the asset’s life through depreciation. Revenue expenditure keeps the business running and the asset in its present condition. It is charged in full to the statement of profit or loss for the year.

The test is purpose, not size. Does the spending bring an asset into use or add to what it can do? Or does it only maintain or run something the business already has?

Concepts behind the treatment

• Accruals: a cost that benefits several years is spread over those years through depreciation, so each year’s profit carries its fair share.
• Prudence: when it is unclear whether spending creates an asset, profit and assets are not overstated, so the cost leans towards expense.
• Materiality: a trivial item, such as a cheap stapler, is treated as an expense even though it lasts for years, because tracking it would cost more than the information is worth.
• Consistency: the same policy is applied from year to year.

Worked example: Ironbridge Print Works

Ironbridge Print Works made these payments during 2026.

Item	Amount	Treatment	Reason
New digital press	48,000	Capital	Asset acquired
Delivery of the press	1,200	Capital	Cost of bringing it to its location
Concrete base and wiring for the press	2,800	Capital	Cost of making it ready for use
Upgrade kit raising press speed by 40%	3,600	Capital	Increases earning capacity
Conveyancing fees on buying the workshop	2,100	Capital	Part of the cost of the property
Wages of own staff who built storage racking	2,400	Capital	Labour used to create an asset
Annual service of the old machine	900	Revenue	Maintains existing condition
Replacement rollers on the old machine	1,500	Revenue	Repair, not improvement
Repainting the workshop exterior	1,750	Revenue	Maintenance
Staple cabinet	35	Revenue	Not material

Capital items total 60,100 and revenue items total 4,185. Suppose the press costs (52,000 in total) were wrongly charged as expenses. Profit for the year would be understated by 52,000, and non-current assets would be understated by the same amount. If the repainting were wrongly capitalised, profit and non-current assets would be overstated by 1,750. Questions often ask for this effect, so state both the profit and the asset.

Where one invoice mixes a repair and an upgrade, split it and treat each part separately.

Depreciation: causes and reasons (1.1.13 and 1.1.14)

Depreciation spreads the cost of a non-current asset, less any expected residual value, over its useful life. It is not a cash payment and it does not build up a fund to replace the asset.

Typical causes:

• Wear and tear from use and the passing of time.
• Obsolescence: new technology or changed demand makes the asset out of date before it wears out.
• Passage of time for assets with a fixed term, such as a lease.
• Depletion of assets that are used up, such as a quarry.
• Inadequacy: the business outgrows the asset.

Reasons for charging it:

• To apply accruals, matching the cost of the asset against the revenue it helps to earn.
• To report a profit that is fairer, since a purchase charged only in year 1 would make that year’s profit too low and later years’ too high.
• To show non-current assets at a more realistic carrying value, which is cost less accumulated depreciation.
• To apply prudence, so assets are not overstated.

The carrying value is not the market value, because depreciation allocates cost rather than measuring resale price.

Methods of depreciation (1.1.15)

Straight line

Annual charge = (cost − residual value) ÷ useful life. Many questions give a percentage of cost instead. For a part year, charge in proportion to the months of ownership unless the question states another policy.

Reducing balance

A fixed percentage is applied to the carrying value at the start of each year, so the charge is highest early on and residual value is not used in the calculation. Round each year’s charge to the nearest dollar unless the question says otherwise.

Revaluation

Used for small items such as tools, where tracking each one is impractical. The asset is valued at the year end. Depreciation = opening valuation + additions − closing valuation.

Ironbridge buys a printing press on 1 January 2026 for a total of 52,000. Residual value is 4,000 and the life is 5 years.

Year	Straight line charge	Reducing balance 40% charge	Reducing balance carrying value
2026	9,600	20,800	31,200
2027	9,600	12,480	18,720
2028	9,600	7,488	11,232
2029	9,600	4,493	6,739
2030	9,600	2,696	4,043
Total	48,000	47,957

The 40% rate brings the carrying value close to the 4,000 residual value rather than exactly onto it, which is normal when the rate is rounded.

Ironbridge also keeps small tools on a revaluation basis. They were valued at 6,400 at 1 January 2026, 1,100 of tools were bought in the year, and they are valued at 5,200 at 31 December. Depreciation is 6,400 + 1,100 − 5,200 = 2,300.

Effect on profit of the method (1.1.17)

Using the table above, reducing balance lowers profit in 2026 by 11,200 compared with straight line (20,800 − 9,600), and by 2,880 in 2027. In 2028, 2029 and 2030 it raises profit by 2,112, 5,107 and 6,904. Total depreciation over the life is almost the same, so the methods change when profit appears, not (broadly) how much. Reducing balance suits assets that lose usefulness fastest early on; straight line suits assets used evenly. Say which fits the asset described.

A higher depreciation charge never changes cash. It lowers profit for the year and the carrying value of the asset only.

Change of method (1.1.18)

Suppose Ironbridge had used reducing balance at 40% and decided at the start of 2029 to move to straight line over the 2 years remaining, keeping the 4,000 residual value.

• Carrying value at 1 January 2029: 11,232.
• New annual charge: (11,232 − 4,000) ÷ 2 = 3,616.
• Charge under the old method would have been 4,493, so profit for 2029 is 877 higher.

The usual approach in questions is to apply the new method to the carrying value from the date of change, without altering earlier years’ profits, unless the question says otherwise. A change in method departs from consistency, so give the reason and the effect on profit.

Ledger accounts (1.1.16)

Ironbridge depreciates plant and equipment on a straight line basis. Its old machine cost 30,000, has been owned for four years, and is depreciated at 10% of cost per year with no residual value, so its provision stood at 12,000 on 1 January 2026. The press is added to the plant account on that date.

Plant and equipment (cost)

2026		Dr	2026		Cr
1 Jan	Balance b/d	30,000	31 Dec	Balance c/d	82,000
1 Jan	Bank	52,000
		82,000			82,000

Provision for depreciation: plant and equipment

2026		Dr	2026		Cr
31 Dec	Balance c/d	24,600	1 Jan	Balance b/d	12,000
			31 Dec	Depreciation expense	12,600
		24,600			24,600

The charge is 3,000 for the old machine plus 9,600 for the press, which is 12,600. It is debited to the depreciation expense account and then transferred to the statement of profit or loss. The statement of financial position shows plant at cost 82,000 less provision 24,600, giving a carrying value of 57,400.

For a revaluation asset the entries are simpler. Ironbridge’s tools account shows opening balance 6,400, bank 1,100 on the debit side, and depreciation 2,300 and closing valuation 5,200 on the credit side. There is no separate provision account.

Disposal of a non-current asset (1.1.19)

Ironbridge sold a van on 31 August 2026 for 9,000. The van cost 21,000 on 1 March 2023, and is depreciated at 20% of cost per year, by months, with no residual value.

• Depreciation to 31 December 2023: 21,000 × 20% × 10/12 = 3,500.
• 2024 and 2025: 4,200 each, so the provision at 31 December 2025 is 11,900.
• 2026 to the date of sale: 21,000 × 20% × 8/12 = 2,800, so the provision at disposal is 14,700.
• Carrying value at disposal: 21,000 − 14,700 = 6,300.
• Profit on disposal: 9,000 − 6,300 = 2,700.

Disposals account: van

	Dr		Cr
Van (cost)	21,000	Provision for depreciation	14,700
Profit on disposal (to statement of profit or loss)	2,700	Bank	9,000
	23,700		23,700

If the proceeds had been below the carrying value, the balancing figure would be a loss on disposal, which is a debit in the statement of profit or loss. The depreciation for the months before the sale is still a charge for the year. The cost and provision accounts are cleared by the same entries.

Schedule of non-current assets (1.1.20)

The schedule summarises cost, accumulated depreciation and carrying value by class. Ironbridge bought a new van for 24,000 on 1 September 2026 at the same 20% rate, so it carries 4 months of depreciation: 1,600.

2026	Plant and equipment	Vehicles	Total
Cost
1 January	30,000	21,000	51,000
Additions	52,000	24,000	76,000
Disposals	0	(21,000)	(21,000)
31 December	82,000	24,000	106,000
Accumulated depreciation
1 January	12,000	11,900	23,900
Charge for the year	12,600	4,400	17,000
Disposals	0	(14,700)	(14,700)
31 December	24,600	1,600	26,200
Carrying value 31 December 2026	57,400	22,400	79,800
Carrying value 1 January 2026	18,000	9,100	27,100

The vehicles charge of 4,400 is 2,800 on the van sold plus 1,600 on the new van.

Common errors

• Capitalising repairs, or expensing delivery and installation costs of a new asset.
• Using residual value in a reducing balance calculation.
• Forgetting to remove the disposed asset’s depreciation for earlier years from the provision.
• Charging a full year on a part-year asset, or none on an asset sold in the year.
• Saying depreciation provides cash for replacement.

Frequently asked questions

How do you decide if spending is capital or revenue expenditure? The test is purpose, not size. Spending that brings an asset into use or improves its earning capacity is capital expenditure; spending that maintains it or keeps the business running is revenue expenditure.

What are the causes of depreciation? Causes include wear and tear from use, obsolescence, the passage of time for fixed-term assets such as a lease, depletion of assets such as a quarry, and inadequacy when the business outgrows the asset.

What is the revaluation method of depreciation? The revaluation method is used for small items such as tools, where tracking each one is impractical. Depreciation = opening valuation + additions − closing valuation.

How is a change of depreciation method handled? The usual approach is to apply the new method to the carrying value from the date of the change, then compare the new charge with the old one to show the effect on profit.

Does depreciation affect cash? No. A higher depreciation charge lowers profit for the year and the carrying value of the asset, but it never changes cash.

Official syllabus

Pearson Edexcel International Advanced Subsidiary/Advanced Level in Accounting (XAC11/YAC11), Specification, Issue 2, September 2018, Unit 1 topic 1.1, outcomes 1.1.11 to 1.1.20.