What is Revenue Expenditure?
Revenue expenditure refers to the funds spent by a company to maintain the regular functioning of the system. It does not boost the profit-generating capacity of a company. It is the total cost incurred by a company in producing goods and services that contribute to revenue generation during a given accounting period. The costs of routine maintenance and repairs that are required to keep an asset properly functioning without significantly enhancing or extending the asset’s useful life are also included in it. The benefits as a consequence of such expenditures often last for less than a year.
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Examples of Revenue Expenditure
Repair and Maintenance of the Assets
The costs for maintaining and repairing the assets that generate revenue are revenue expenditures because these costs support the business’s ongoing operations and have no impact on the asset’s lifespan.
For the company to operate and generate income, the employees must receive a salary.
For the business to continue operating and generating income, the corporation must spend money on utility expenses like phone, water, and power bills. These are revenue expenditures since they are necessary for the efficient operation of the enterprises.
This includes renting a place for employees to work. For a manufacturing company, this can also include a storage space to store goods before transportation.
These are costs a business incurs during the marketing, advertising and selling of the finished product. They are a component of revenue expenditures because they boost company sales.
Types of Revenue Expenditure
Direct expenses are the costs that are incurred directly during the production of goods and services. For manufacturing companies, costs incurred during the transformation of raw materials into finished items or products are an example of a direct expense. Additionally, direct expenses include the costs that are incurred during regular business operations. Costs like electricity used during production, worker wages, legal fees, rent, shipping-related costs, and freight charges are all considered direct expenses.
Indirect expenses are the costs a business incurs during the sale and distribution of the final goods and services. These costs include taxes, employee salaries, depreciation, and interest. Repair and maintenance expenditures are also classified as indirect expenses. Even though they are not directly related to the final goods, indirect expenses support the efficient functioning of the asset, which in turn supports the efficient functioning of the company.
Importance of Revenue Expenditure
Understanding the performance of each revenue expenditure product helps in identifying various cost heads necessary for running a company. This allows the company to determine the indispensable costs required for the efficient functioning of the company.
Identify Unnecessary Expenses
Businesses can determine which costs will take longer to pay for themselves if they have a better understanding of it. As a result, it is useful for companies to identify expenses that are unnecessary or those that could put unnecessary pressure on their liquidity.
Improved Financial Situation
By keeping track of revenue and expenses, a company is better able to analyse and forecast the financial health of its operations.
Limitations of Revenue Expenditure
No Long-Term Horizon
The benefits typically last for less than one year and thus are only effective in the short term. For example, employee salaries are paid monthly and the employees work for as long as they are paid. The company can only benefit from the employees till such time. Thus it cannot be an investment that benefits after one year.
Since it does not involve investment in fixed assets, it only helps in determining the firm’s present financial situation and not its future growth. Expenditure on property rent and freight are a few examples where the benefits are just temporary and do not add to the company’s future growth.
Lack Profit Generating Capacity
It ensures the smooth functioning of assets and not their upgradation and purchase. For example, the property rent for a building, which is a revenue expenditure, ensures daily functioning and provides no returns in the future. Thus, it does not impact the profit-generating capacity of the company.
You may also like to read about the Differences Between Capital Expenditure and Revenue Expenditure
Frequently Asked Questions
Administrative expenses including rent, utilities, property taxes, and business travel are a few examples of revenue expenditure. Costs associated with research and development are another kind of revenue expenditure because they cannot be capitalised under the major accounting frameworks.
Expenditure on tangible assets like the purchase of land, vehicles, tools, and machinery and intangible assets like patents and licences are not considered revenue expenditures. The expenditure on the upgradation of these assets is also not considered revenue expenditure.
Yes. Salary is regarded as a revenue expenditure.
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