Key Idea: Every business needs money before it earns any, and keeps needing it to run and grow. This topic is why, and the two kinds of spending that money pays for.
Why finance is needed
- To start: equipment, premises and stock before the first sale.
- To run: wages, ingredients and rent every week, whatever the sales.
- To grow: a new shop, a new oven, a new market.
Capital expenditure
- Spending on things kept for more than a year.
- At Lena's: the Mill Lane bakehouse, a $45,000 deck oven, the vans.
- Usually paid for with long-term finance.
Revenue expenditure
- Spending on things used up in running the business.
- At Lena's: flour, wages, rent, an oven repair.
- Paid from day-to-day income or short-term finance.
The words to know
| Word | Means | Do not confuse with |
|---|---|---|
| Finance | the money a business raises and uses to start, run and grow | profit, which is what is left after costs |
| Capital expenditure | spending on assets kept and used for more than a year | a large amount: a big flour bill is still revenue expenditure |
| Revenue expenditure | spending on items used up in the day-to-day running of the business | revenue, which is money coming in from sales |
Sort the spending by how long it lasts: kept for years is capital, used up in running is revenue. Then use the case: name the item and say why it belongs where it does.
Exam-style question
Lena's Bakery Ltd plans to buy a second deck oven for Mill Lane for $45,000 in 2026. Each week it also spends about $9,200 on flour. With reference to Lena's Bakery Ltd, explain the difference between capital expenditure and revenue expenditure.
Model answer plan
See the mark-by-mark plan — for / against / judgement, with marking guidance — in study mode.
Important: A $900 oven repair is revenue expenditure; a $300 bread slicer kept for years is capital expenditure. Ask how long it lasts, not how much it costs.
Tap each card to check yourself.
State two reasons why a business needs finance. Any two: to start up, to pay running costs before sales come in, to grow, to survive a bad period.
Capital or revenue: a new delivery van? Capital. It is kept and used for several years.
Capital or revenue: the monthly rent on a shop? Revenue. It pays for this month's use and is paid again next month.
Capital or revenue: a $900 part to repair an oven? Revenue. It keeps an existing asset running; it does not buy a new one.
Why pay for a new oven with long-term finance? It earns money over many years, so it makes sense to pay for it over many years too.
Why does a new business need finance before its first sale? Equipment, premises and stock must be paid for before any customer pays.
Exam tips
- Capital expenditure lasts more than a year; revenue expenditure is used up in running the business.
- Decide by how long the item lasts, never by how much it costs.
- Revenue expenditure is spending; revenue is income. Keep the two words apart.
- In an Explain, name the item from the case for each type.
- Link the spending to the finance: long-lasting assets need long-term money.