3.1 Introduction to finance
Why every business decision eventually becomes a finance decision.
The finance function makes sure a business has enough money to operate and grow, records how money is used, and helps managers make decisions. Without enough finance, even a business with excellent products can fail.
Capital expenditure and revenue expenditure
- Capital expenditure
- Spending on non-current assets that will be used for more than one year, such as buildings, machinery, vehicles, computers. It appears on the balance sheet.
- Revenue expenditure
- Spending on the day to day running of the business that is used up within the year, such as wages, rent, raw materials, electricity, advertising. It appears in the profit and loss account.
Capital expenditure examples
- A bakery buys a new oven
- A delivery firm buys three vans
- A school builds a new science lab
Revenue expenditure examples
- The bakery buys flour and pays staff
- The delivery firm buys fuel and insurance
- The school pays its electricity bill
The distinction matters because the two types are financed differently. Capital expenditure is usually large and long term, so it is matched with long term finance such as loans or share capital. Revenue expenditure is regular and short term, so it is paid from sales revenue or short term finance such as an overdraft.
- Classifying a repair or a refill of stock as capital expenditure. Only spending on assets used for more than a year counts as capital expenditure.
Practice questions
New IB style questions every time. You won't get the same one twice until you've done them all at this level.
All companies, people, products, places and figures in these questions are fictional. Any resemblance to real businesses or people is a coincidence and is not intended.