In this task I have been asked to explain the difference between capital income, revenue income, capital expenditure and revenue expenditure.
Capitan income is money invested into the business to buy equipment. For example Future Fashion will invest money into their business to buy equipment such as hangers, clothes stands. These kinds of things will stay in Future Fashion for a long period therefore this means they are known as fixed assets which means items which will stay in the business for a long period of time. When Future first opened up their business they may have used capital income to but opening stock but as the business develops stock will then be paid for using sales income.
A sole trader is a business who owns a business on their own therefore Future Fashion is a sole trader business as an individual person owns it. Therefore Future Fashion has to find all their capital income from their own sources or personal loans. Mostly sole trader businesses invest their personal savings or borrow from the bank using their personal assets such as their house to secure the loan. For example Future Fashion may give their house to the bank to get a loan but this is a big risk for Future Fashion as they have to responsible for the debts of its business itself. As a sole trader business Future fashion can keep all its profits to itself.
A partnership is when two or more than two people set up a business. They are then known as partners. Each partner will have to contribute towards the business, they will have to contribute towards the capital income, therefore increasing the amount of money available. Partners all share making decisions for the business and the profit. Some partnerships any loans taken out are still taken out by using their own assets which is a huge risk.
A company is when a business is registered with Companies House and issues shares to its shareholders. Therefore shareholders are the owners of the business and all contribute towards the capital income.
A loan is a sum amount of money which is lent to a business from a bank. It is a certain amount of money that has to be paid back in a certain amount of time such as five years, but sometime longer term loans can be agreed. As well as paying back the loan back an interest will be charged too. This is the amount of money that is being charged for the loan as a percentage of the amount that was borrowed. The interest rate a bank charge can be a fixed amount or may vary with changes in the economy. It is the interest payable on top of the loan that makes a loan a relatively expensive source of capital income. Also monthly payment will have to be paid even though if the business isn’t making a profit. Banks have certain procedures so that they can lend money to businesses but it is not guaranteed that banks will lend money to businesses because businesses will have to be specific how the money borrowed will be spent on and how the business will pay the bank back. When banks give out loans they need a guarantee that the business will pay back their money, the guarantee a business will have to give might be their house or the businesses vehicles. Therefore if the business fails to pay back the loan the bank can reclaim the asset.
For example if Future Fashion is in need of money they will go to the bank and ask them for a loan but they will have to give the bank a guarantee that they will pay the money back. A guarantee may be the owner’s home. Also Future fashion will have to tell the bank what they will be spending the money so they can tell the bank they will be spending the money on some new stock, to pay for equipment and to pay bills. Also Future fashion will have to keep in mind that the ban will charge them interest for the amount of money they borrow, for example if Future fashion borrow £1000 they may have to pay 10% interest of this amount.
A mortgage is similar to a bank loan but is a larger amount of money over time of 25 years. Mortgages are always secured on a property. Some individual will take a mortgage out on their homes. Businesses might take out a mortgage to buy their premises for example a factory, retail store or a warehouse.
For example Future fashion may take out a mortgage out on their premises to make it theirs. They will have to pay a lump sum amount of money for about 25 years.
Revenue income is the money that comes into the business by performing its daily function by selling goods or providing a service. Therefore money coming into the Future fashion will be known as Revenue income. The revenue income depends on the activities that the business does to bring money into the business and three main sources are:
Sales- sales are money coming in from the sales of goods or services. For example Future fashion has money coming in when each customer buys a product from their shop. Sales at future fashion can be cash sales where the customer pays there and then, or credit sales where the customer buy then but pays at a later date.
Rent received- a business that owns a property and charges others for use of all or part of that property will receive rent as their main source of income.
Commission received- a business may sell products or services as an agent of another business. They sell product for another business and they get paid a percentage on that sale. This percentage is called commission.
Capital expenditure is items bought by the business for a long period of time. For example Future Fashion will buy desks, tills, stands and furniture for their business which will stay in their business for a long period of time. This will therefore be known as capital expenditure.
Fixed assets are objects bought by the business and then will stay in the business for a long time. For example Future Fashion will buy objects for their business and then record those on their balance sheet the balance sheet will include equipment, furniture and fittings. These are referred as tangible assets as they cannot be touched. The balance sheet for Future Fashion can change very rarely as sometime object lose their value and don’t have importance so new objects need to be bought into the business.
Intangibles are something owned by the business therefore Future Fashion but they cannot touch it but adds value to Future Fashion. There are three intangibles which may exist in Future Fashion:
Goodwill- is when you buy an existing business its name and reputation will already be known. It also may it set of customers. This will increase the value of the business and also may increase the selling price of the business. A sum of money is added to the value of the business to reflect the value if this goodwill.
Patents- a patent is a unique feature of a product or a new process. A business may have a patent to stop other from copying their unique style of their product or process. Having a patent gives many opportunities to the business for the future such as launching a more expensive selling price for their product which has a patent.
Trademarks-a trademark is a symbol, logo, brand name which a business uses to stand out from its competitors. Trademark can be a big impact on customers it affects their buying choice. And it can also build a strong brand loyalty.
Revenue expenditure is spending on items which are an everyday thing, which means money which is spent every day on the same things. These are the expenses incurred by Future Fashion that are shown on the profit and loss account. Some of the costs which Future Fashion may spend their money on are:
Future Fashion will have some sort of premises cost. There are a number of costs associated with premises. For example:
Rent- Future Fashion may not own the premises and may have to pay a sum amount of money for its use of the premises.
Rates- this is an amount of money Future Fashion have to pay to the council to go towards services such as street lights and refuse collection. This will not be a set amount for Future Fashion, it will depend on their business.
Heating and lighting- this includes services such as gas and electricity. Future Fashion will receive regular bills every three months for using gas and electricity services.
Insurance- Future Fashion should legally take out various types of insurance to protect them from any losses. These may include:
Building insurance- this insurance will protect the building from damage which may be caused by events such as a fire.
Contents insurance- this insurance will protect whatever Future Fashion will have in the business such as stock and equipment. They will be protected from events such as floods.
Public liability insurance- this insurance will be taken out by Future Fashion to protect people within the building who may be harmed during an incident.
Administration is all about paperwork within the Future Fashion such as paperwork regarding employees, suppliers and customers. Administrative costs include things such as postage, printing and stationary; this may include items such as Future fashion business cards, headed paper and order books. For example Future Fashion will have a lot of paperwork regarding business details about their employees about their business and also about their regular customers but mainly they will have paper work regarding their suppliers for example copies of past orders and bills regarding these orders. Also Future Fashion will have a line rental will come under administrative cost.
As Future Fashion will employ staff members they will have to bear the costs for them too. These will include:
Salaries-a salary will be given to those employees who are paid monthly which is divided through an annual figure. This will be given to the accountant of Future Fashion as they will be given a salary. Also then this employee will have to pay National insurance and Tax which will be reduced from their salary.
Wages-a wage will give to those employees who will help Future Fashion to sell their items. They will be getting paid hourly. Depending on the hourly rate.
Training- Future Fashion can train their employees and then their employees will get paid based on the training rate.
Insurance- future fashion will be responsible for its employees while carrying out duties related to their work and therefore future fashion has to take out liability insurance.
Pensions- future fashion can offer a pension scheme to their pensioners such as an
Selling and distribution costs
If future fashion wanted to cover all their costs they will have to make enough sales. Future fashion must be able to attract customers and try their best to sell their products to customers. Selling and distribution costs include:
Sales staff salaries- future fashion will employ workers with a certain responsibility but their purpose will be to make sales.
Carriage of sales- this is the cost of getting the sale to the customer and can range from something as simple as an envelope and stamp or courier delivery to something much more complex with fragile products or products being shipped to another country.
Marketing- this covers a whole range of costs associated with attracting customers and convincing them to make a purchase.
Future fashion do not operate on cash basis they also accept payment by cheque, or direct bank transfer. This means future fashion will need a bank account. Finance cost to future fashion will include:
Bank charges- the bank will charge future fashion each time a cheque is paid or written and whenever cash is deposited. Future fashion may offer them free banking for the first year as a marketing technique.
Loan and mortgage interest- if future fashion will have a loan or a mortgage then they will have to pay an interest.
Future fashion will have to purchase stock to keep their business up and running. For example as they are a clothing business they will need to purchase clothes. When future fashion first opened their business they had to pay for their stock with cash but as time goes by they can purchase stock on credit which means they can have the stick and pay 30 days later. If future fashion does well their suppliers will give them good deals on stock each time they make a purchase with them.