Revenue Expenditure

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 sales, and the other is related to Opex. 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 principle)

Examples of Revenue Expenditure

Revenue expenses 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 cost. Thus they are shown in the statement of income of the year in which they are incurred.

Revenue Expenditure

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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 CAPEX.
  • 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?

Types of Revenue Expenditure

They are of two types –

  • Direct Expense
  • Indirect Expense

#1- Direct Expense

The direct expense 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 income 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.

This article has been a guide to Revenue Expenditure and its meaning. Here we discuss the list of examples of the revenue expenditure along with its types and detailed explanation. You can learn more about accounting from the following articles –

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