Distinction Between Capital and Expense

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The presentation was about operational accounting. This topic was discussed by Justin Gorey, who is the senior management accountant. The speaker examined a variety of questions such as the definition of operational accounting, return on investment, the differences between capital costs and expenses, the law of diminishing returns, and many other issues related to the work of financial managers and accountants.

I would like to focus on such a point as the distinction between capital and expenses. In particular, the term capital is used to depict the costs that are needed to create an asset that can later generate revenues¹; for instance, one can speak about the procurement of technologies that improve productivity. In contrast, such a notion as expenses is related to the costs of which are consumed immediately, but they do not lead to the creation of additional assets². For example, one can speak about the compensation paid to employees. This distinction is of great interest to me because it enables accountants and financial managers to understand whether a certain company uses its resources effectively. Before this presentation, I did not divide operational expenses into different groups. Therefore, I might have misjudged the performance of a certain business such as a manufacturing enterprise. Moreover, I could have provided misleading information about its financial performance. This is one of the pitfalls that I will be able to avoid.

This distinction is important for such a field as operational accounting. Entrepreneurs and accountants should distinguish these notions to make sure that investors and stockholders can gain better insights into the financial performance of a business during a certain period. Furthermore, this issue can be important for negotiations during which entrepreneurs often need to convince their partners that their financial performance is sound. To achieve this goal, a person may need to emphasize distinctions. Under such circumstances, one should clearly explain how effectively the resources of the organization are managed. Thus, a person should have a clear idea of such notions as capital and expenses.

After learning about the distinctions between capital costs and expenditures, I will be able to form more informed decisions about the work of different businesses. Moreover, I will manage to gain better insights into their decisions of entrepreneurs or the policies pursued by various businesses. For example, while examining the costs of an organization, one should determine the share of capital costs and expenses. Apart from that, it is vital to keep in mind that the increasing costs are not necessarily a sign of poor performance, because the manager often has to invest capital in the improvement of the production process.

In my opinion, the understanding of this issue can be invaluable for a person who works in such areas as business administration, accounting, or finance. Moreover, this presentation has prompted me to pay more attention to the standards of financial reporting. In particular, I will make a clear distinction between capital and expenses in my financial statements. This issue is important for making judgments about the future performance of a company. Thus, investors should take this information into account while taking decisions. On the whole, the ideas expressed by Justin Gorey proved to be very illuminating to me. To a great extent, they changed my perception of accounting and the management of financial resources. These are the main points that can be made.

Bibliography

Damodaran, Aswath. Investment Valuation: Tools and Techniques for Determining the Value of Any Asset. New York: John Wiley & Sons, 2012.

Penner, Susan. Economics and Financial Management for Nurses and Nurse Leaders: Second Edition. New York: Springer Publishing Company, 2013.

Footnotes

Susan Penner, Economics and Financial Management for Nurses and Nurse Leaders: Second Edition (New York: Springer Publishing Company, 2013), 135
Aswath Damodaran, Investment Valuation: Tools and Techniques for Determining the Value of Any Asset (New York: John Wiley & Sons, 2012), 232.

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Distinction Between Capital and Expense

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