What is Revenue Expenditure?
Revenue expenditure is a short-term expense in a business. It is spent immediately or within a financial year. It is fully taken into the company’s Profit & Loss (P&L) account for the financial year in which it is spent. It is also referred to as operational expenses (Opex) or revenue expenses. Some common examples of revenue expenditure are office supplies, rent, utilities, etc. Besides maintaining the operational activities of the business, revenue expenditure is mostly incurred to maintain fixed assets. They are basically operating costs that don't lead to any asset creation. However, they are important to generate revenue in a financial year.
The benefits that result from revenue expenditure are limited to the financial year of a business. Revenue expenditure is influenced by certain factors. These are:
- Nature of business
- Reason and maintenance
- Number of times the expenditure is required
- The amount of money spent on that purpose
Types of Revenue Expenditure
Revenue expenditure is recurrent in nature. As a result, it is deducted from the income of that particular year to arrive at the profit of that year.
Revenue expenditure is divided into two groups: Direct expenses and indirect expenses.
Direct expenses – These are costs sustained during the production of goods and services. All costs that arise in the course of the day-to-day operations of a business are also categorised as direct expenses. For instance, costs incurred by a manufacturing company to convert raw materials into final goods are direct expenses. Some common examples of direct expenses are electricity bills incurred in the production of goods, rent paid, wages paid to workers, shipping costs, legal expenses, freight charges, commission, import duty, etc.
Indirect Expenses – The second type of expense under revenue expenditure is indirect expenses. These expenses are made during the process of sale and distribution of the finished goods and services. Money spent in managing repeated administrative operations of a business is also categorized as indirect expenses. Some types of indirect expenses are salaries of employees, taxes, interest, depreciation, repairs, miscellaneous expenses, etc. Basically, these costs are not directly associated with producing the finished goods. Yet, they are needed for smooth operations to produce the asset which is essential for the proper functioning of a business.
Example of Revenue Expenditure
Businesses require mentioning the revenue expenditure on their P&L Statement. However, these expenses are not shown in the Balance Sheet of the company. Here is an example of a P&L Statement and how revenue expenditure is categorized on it:
Optimization of current resources and implementation of cost-cutting policies can help in managing revenue expenses and improve the financial position of a business.
Importance of Revenue Expenditure
Revenue expenditure for any business plays an important role in its smooth functioning. Here are a few points which reveal its significance:
- Revenue expenses help companies to determine and adjust any expenses they deem as non-essential whenever required.
- Knowing the importance of every revenue expense helps in understanding the indispensable costs for an operational business.
- Recording revenue expenses allows companies to analyze and project their financial condition in a better way.
- Revenue expenditure is also a determinant of a business's efficiency in cost and stock management.
Revenue expenditure is incurred on a day-to-day basis in any business. They assist in income generation in the same financial period in which they arise.
Q. Is the cost incurred in the repair of second-hand machinery categorized as revenue expenditure?
A. The cost of repair incurred immediately after buying a second-hand machine or an asset to get it into working condition is treated as capital expenditure. However, once the asset or machinery is put to work, the expenses incurred in increasing its life efficiency are categorised as revenue expenditure, as these expenses will be incurred at regular intervals.