Following your request, I would like to state how the distinction between money spent on assets and revenue expenses should be made in the company with limited liability. I would also like to use the above accounting concepts to show, by using recent example of WorldCom Inc. bankruptcy, how the can be manipulated and misused in order to overstate annual profit figures.
According to the finance and accounting theory revenue spending or expenditure defined as money spent on the day-to-day running of the business. These items usually have only a short-term effect on the business, but they have direct influence on the firm profits. Whereas capital expenditure is the spending on items, which are normally last more than one year, things that are used repeatedly. Capital goods do not have direct influence on the profit figure, however they are very significant as these items used to generate future profits of the organisation.
Another important factor, which influences profitability of the business is the depreciation provisions which should be provided for every item of capital expenditure. There are, of course, certain rules how a business should record revenue and capital expenses. What WorldCom done is one of the "simplest accounting tricks"(FT). Management of the corporation simply recorded some of the revenue expenses as investment in fixed assets (capital), which gave them opportunity to spread short-term costs over longer period of time through the use of depreciation provisions. However, what the most dramatic consequence of that "shadow accounting" practice is the fall in investors confidence in accounting rules, principles and practices, including independent auditing and governmental bodies.
As I already stated in the introductory passage there are certain rule and procedures, which accountants should follow. Both capital and revenue expenditure have different effects on the accounts. Revenue expenditure on short-term assets, such...