Meaning of Revenue Expenditure
Revenue expenditure refers to those expenditures which are incurred during normal business operation by the company, benefit of which will be received in the same period and the example of which includes rent expenses, utility expenses, salary expenses, insurance expenses, commission expenses, manufacturing expenses, legal expenses, postage and printing expenses, etc.
Explanation
Revenue expenditure is the sum of the expense that the business incurs in the production of goods and services, which helps for revenue generation of the company in an accounting period.
- It is primarily two types – one is related to the cost of salesCost Of SalesThe Cost of Goods Sold (COGS) is the cumulative total of direct costs incurred for the goods or services sold, including direct expenses like raw material, direct labour cost and other direct costs. However, it excludes all the indirect expenses incurred by the company. read more, and the other is related to OpexOpexOperating expense (OPEX) is the cost incurred in the normal course of business and does not include expenses directly related to product manufacturing or service delivery. Therefore, they are readily available in the income statement and help to determine the net profit.read more. Cost of sale is the expense done on acquiring of goods or service which need to sale in the market and operating expense is an expense which needs to be done to run business and its operations properly.
- These expense to be recorded in the same period when revenue is generated on produced of goods or service (matching principleMatching PrincipleThe Matching Principle of Accounting provides accounting guidance, stating that all expenses should be recognized in the income statement of the period in which the revenue related to that expense is earned. This means that, regardless of when the actual transaction is made, the expenses that are entered into the debit side of the accounts should have a corresponding credit entry in the same period.read more)
Examples of Revenue Expenditure
Revenue expensesRevenue ExpensesRevenue expenditure refers to those costs incurred during regular business operations by the organization while availing its benefits in the same period. Such operating expenses include rent, utility expenses, salary, insurance expenses, etc.read more are expenses incurred by the business in the daily working of the business and the effect of which will completely be utilized within the current accounting year in which it incurred. These costs are recurring in nature and do not form the part of the fixed asset costFixed Asset CostFixed assets are assets that are held for the long term and are not expected to be converted into cash in a short period of time. Plant and machinery, land and buildings, furniture, computers, copyright, and vehicles are all examples.read more. Thus they are shown in the statement of income of the year in which they are incurred.
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Source: Revenue Expenditure (wallstreetmojo.com)
- Repair and Maintenance of the Assets – The expenditure incurred on the repairs and maintenance of the assets generating the revenuesRevenuesRevenue is the amount of money that a business can earn in its normal course of business by selling its goods and services. In the case of the federal government, it refers to the total amount of income generated from taxes, which remains unfiltered from any deductions.read more are considered as the revenue expenditure as expenses are incurred for providing the support to the current operations of the business and do not affect the assets life.
- Wages paid to workers of the Factory – The wages are paid to the workers are required for the purpose of working of the company and running of the business for generating revenues. So, these are considered to be revenue expenditures.
- Utility Expenses – Utility expensesUtility ExpensesUtilities Expenses are the prices incurred by a Company for the usage of utilities like sewage, electricity, waste disposal, water, broadband, heating, & telephone. These are included as operating expenses in the Company’s income sheet. read more such as expenses incurred on phone bills, water bills, electricity bills, etc. are required to be spent by the company to continue its business operation and generate revenue. Without the use of these resources, the working of the businesses cannot effectively take place and thus are part of revenue expenditures.
- Selling Expenses – Selling expensesSelling ExpensesThe amount of money spent by the sales department on selling a product is referred to as selling expenses. This includes expenses incurred on advertising, distribution and marketing. Because it is indirectly related to the production and delivery of goods and services, it is classified as an indirect cost.read more are required for selling the products timely. It is used to promote and market the products to the customers. As it is spent on increasing the sales of the business, they form part of the revenue expenditure.
- Rent Expense – The expenses incurred in renting the premises on which the business is operating or renting the other materials will be considered as part of revenue expenditure as they are essential for running the business.
- Other Expenses – Any other expenses which are related to generating the revenue of the business or maintenance of revenue-generating assets are to be considered as the revenue expense.
Practical Examples
Case Study #1
Consider a company XYZ Ltd manufacturing and selling the packets of the pen. The company spends each year for various expenditures such as manufacturing of pens, salaries to employees, Utility bills, repairs and maintenance, acquisition of the assets, etc. It is not sure about which expenditure to be treated as revenue expenditure.
- The amount spent every year, required for generating the revenue or maintenance of revenue-generating assets will be considered as the revenue expenditures. Additionally, expenses incurred to acquire any of the assets or improve the capacity or life of the assets will be treated as the CAPEXCAPEXCapex or Capital Expenditure is the expense of the company's total purchases of assets during a given period determined by adding the net increase in factory, property, equipment, and depreciation expense during a fiscal year.read more.
- In the present case amount spent every year for making pens and packing it to employees, Utility bills, wages to workers, insurance, rent, etc., will be categorized as the revenue expenditure.
- Apart from this, any cost of repair on machines, used for the manufacturing of pens, will also be considered revenue expenditure.
- On the other side, any amount which the company spends on acquiring the assets or upgrading the machinery used for the manufacturing of the pens for increasing capacity, life or quality, etc. will be treated as the capital expenditure of the company.
Case Study #2
Company ABC Ltd. started the business of manufacturing and selling bakery items in the market. For that purpose, it buys a machine so that the bakery items can be produced. The owner of the company is arguing that it should be treated as revenue Expenditure. How should it be treated?
- In the present case, the initial purchase cost of the machinery, along with the installation costs will be classified by the business as the capital expenditure because the benefit of the machinery will be derived by the business for the several accounting periodsSeveral Accounting PeriodsAccounting Period refers to the period in which all financial transactions are recorded and financial statements are prepared. This might be quarterly, semi-annually, or annually, depending on the period for which you want to create the financial statements to be presented to investors so that they can track and compare the company's overall performance.read more and not in the single accounting period.
- However, any subsequent cost incurred on the repair and maintenance of the company will be considered as the revenue expenditure. It is because when the cost of repair and maintenance incurs, that neither increases the earning capacity of the machine.
- The machine will be going to produce the same quantity of the bakery products as it used to do earlier when first it was put to use by the business, nor will it increase the life expectancy of the machinery. I.e., the life of the machinery will remain the same as it was at the start, and the cost is incurredCost Is IncurredIncurred Cost refers to an expense that a Company needs to pay in exchange for the usage of a service, product, or asset. This might include direct, indirect, production, operating, & distribution charges incurred for business operations. read more just for the maintenance of the asset. So, the initial purchase of the machinery will be considered as capital expenditure and not revenue expense.
Types of Revenue Expenditure
They are of two types –
- Direct Expense
- Indirect Expense
#1- Direct Expense
The direct expenseThe Direct ExpenseDirect costs are costs incurred by an organization while performing its core business activity and can be attributed directly in the production cost, such as raw material costs, wages paid to factory staff, power & fuel expenses in a factory, and so on, but do not include indirect costs such as advertisement costs, administrative costs, etc.read more is expense occur from the production of raw material to final goods and service. The direct expense example is wages of labor, shipping cost, power, and electricity bill cost, rent, commission, legal expense, etc.
#2- Indirect Expense
The indirect expense is expenses occur indirectly; they are generated in connection with the selling of goods and services and its distribution. Indirect expense examplesIndirect Expense ExamplesIndirect expenses are the general costs incurred for running business operations and management in any enterprise. In simple terms, when you want to buy grocery from a supermarket, the transportation cost to get you to the supermarket and back is the indirect expenses.read more are machinery, depreciation, wages, etc.
Conclusion
Revenue expenditure is the expenditure incurred by the company during its ordinary course of business operationsBusiness OperationsBusiness operations refer to all those activities that the employees undertake within an organizational setup daily to produce goods and services for accomplishing the company's goals like profit generation.read more. Here the benefit will also be received in the same accounting period in which expenses incurred, and it shows as the expense in the income statement of the company. Generally, such expenditures will be divided into two categories, i.e., expenses on maintenance of revenue-generating assets and the expenses on things used for generating the revenue of the business.
It includes the spending by the company on the expense, which will match with the reported revenues on the statement of income of the current year. It is charged at the expense in the statement of incomeStatement Of IncomeThe income statement is one of the company's financial reports that summarizes all of the company's revenues and expenses over time in order to determine the company's profit or loss and measure its business activity over time based on user requirements.read more as soon as the cost is incurred as by this business is using the accounting principle of matching for linking the expense incurred with the revenues generated in the same reporting period. With this concept, the income statement results will give more accurate results to the user of the income statement of the company.
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