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IB DP Business Management — Unit 3: Finance and Accounts | SL | 3.1 Introduction to Finance
📋 What You Will Learn
- Define capital expenditure and revenue expenditure and distinguish between them using the subject guide's language
- Explain why the distinction matters for financial reporting, taxation, and business decision-making
- Apply the capital/revenue distinction to real business spending decisions, including borderline cases
- Analyse how misclassifying expenditure affects a firm's reported profit and asset values
- Evaluate the implications of a business's expenditure mix for its financial health and long-term strategy
📊 Topic Importance
| Paper | Relevance | Common Question Types |
|---|---|---|
| Paper 1 | High | Classify spending decisions for the pre-seen company; explain impact on profit or the statement of financial position |
| Paper 2 | High | Section A/B: identify or explain capital vs revenue; link to income statement or balance sheet entries |
| Paper 3 (HL) | Moderate | Justify a spending recommendation for a social enterprise, distinguishing capital from revenue costs |
🔍 Guiding Question When a business spends money, does that spending build lasting value or simply keep the lights on — and why does the answer change everything about how the firm's finances look on paper?
🌍 Why This Matters In 2023, Tesla spent billions on new Gigafactory construction in Texas (capital expenditure) while simultaneously paying billions in electricity, wages, and raw materials to run its existing factories (revenue expenditure). How Tesla classifies and reports these two very different types of spending determines its reported profit, its asset base, and how investors judge its financial health — making this one of the most consequential distinctions in all of business finance.
What Is Expenditure?
Every business spends money. The critical question is not how much is spent, but what kind of spending it is. The IB syllabus draws a sharp line between two fundamentally different categories of business spending, each treated differently in financial accounts.
- All business spending is called expenditure — the outflow of money to acquire goods, services, or assets.
- The nature of what is acquired — and how long it benefits the business — determines whether spending is capital or revenue in nature.
- This classification is not just an accounting technicality: it directly affects reported profit, tax liability, and the balance sheet.
Capital Expenditure (CapEx)
Some spending creates something that will benefit the business for more than one accounting period. Think of buying a delivery van: it will be used for years, not consumed in a single day. This is the defining feature of capital expenditure.
📘 Capital Expenditure (CapEx) Spending on non-current (fixed) assets that will be used by the business over more than one accounting period. Capital expenditure appears on the statement of financial position (balance sheet) as an asset, not as an expense on the income statement.
- Examples of capital expenditure:
- Purchasing land, buildings, or factory premises
- Buying