Behind the financial success of every business organisation, whether it is small, medium or large is operation scale and size, revenue plays the most significant role. Without revenue, every business not only fails to stay in the market by continuing its regular business operations but also fails to conduct its activities related to business operations.
Revenue also referred to sales for the profit-making business organisations. It is the volume or amount of cash a company uses to bring in or earn before taking out any expenses. From the perspective of accounting, revenue consists of the amount collected by a company from the customers after selling products or services to them.
Understand the importance of Revenue
Revenue called the life-line of every business organisations. Besides the profit-making business organisations, revenue also stands as the most important element for non-profit organisations too. This is because revenue is the only element that not only accelerates an organisation’s operations but also ensures its existence by ensuring the movement of its organisational activities on a regular basis.
Customers are the ultimate users of the products and services a company uses to produce or deliver and they use to get such products or services from the producer company in exchange of money that constitutes revenue for the producer company. In order to ensure revenue, a company uses to incur a number of expenses or expenditures.
What is Expenditure and its elements
Expenditures, as incurred by a business organisation are classified into two segments of expenditure, the first one is revenue expenditure and the second one is capital expenditure.
One of the crucial elements of expenditure incurred by a company is revenue expenses or revenue expenditures. Revenue expenditures are the extra expenses incurred by a company because any of its asset, but they do not increase the useful life of such asset or it productivity or add any kind of additional value to that asset.
All such expenditures are considered as revenue expenditures that are necessary for a company to incur in order to generate business revenues for a specific accounting period and the benefits of such expenditures are not expected to spill over to the future periods. On the other hand, capital expenditures are the kind of expenditures that deliver benefit to a company, which incurs such expenditures, for a number of future years or more than one accounting period.
Revenue expenditures are not reflected through a company’s balance sheet but are reflected through its income statement. Unlike the revenue expenditures, those are expensed out in the particular financial period exactly in which they are incurred, capital expenditures are capitalised on the company’s balance sheet. One of our finance experts assisting students with personal finance homework explains the concept of revenues below:
Definition(s) of Revenue Expenditure(s) with Example
Revenue expenditure is also known as income statement expenditure. It is a type of cost which is related to a company’s asset and it is not capitalised because of its incapability of providing future financial benefit to the company. In some other words, this type of expenditure refers to the extra expense incurred by a company during a specific financial year because of a particular asset.
Revenue expenditures are not something that can add additional value to an asset or add more useful life to it or increase its productive performance. These kinds of expenses are not considered for adding them in the assets’ book value because of their inability to draw future benefits for the company though the assets for which such expenditures are incurred are something that provides future benefits for a company.
Revenue expenditures are attached to assets as well as expenditures that are made by a company for conducting its regular business activities during a year. In other words, the expenditures which are incurred by a company for meeting its daily business requirements are called revenue expenditures. These expenditures impose a short-term effect on a company and its net income. Thus, the benefits related to these kinds of expenditures are enjoyed by a company within the same accounting year when these are incurred.
Revenue expenditures are also called as ‘expired costs or expenses.’ Examples of revenue expenditures include expenses related to purchasing of goods, postages, rent, payment of salaries, stationery purchased, traveling expenses, payment of wages on products purchased and more.
Revenue expenditures stand as the sum of expenses that a company incurs during the production of products or services that helps it to accelerate the revenue generation process in a particular accounting period. A company that incurs these types of expenditures on the services or items that are useful to it but are used-up within less than a year increases the company’s profit-making capacity temporarily.
Along with the above stated examples, revenue expenditures also include the expenses incurred for purchasing raw material, storages as much as required for conducting manufacturing practices in order to manufacture saleable goods or services.
In also include the expense made for maintaining fixed assets to ensure their working conditions such as repair and maintenance expenses in relation to machinery, furniture, building, and any other fixed asset.
Following are some of the other examples of a company’s revenue expenditure
- Payment of wages to the factory workers.
- Cost of oil required for lubricating machines.
- Cost of power or electricity required for running a motor or machine.
- Bad debts.
- Repairs and maintenance related to every expense incurred for improving fixed assets.
- Cost of goods that are sale-able in nature.
- Depreciation expenses related to the fixed assets utilized by a company for conducting regular business operations of manufacturing.
- Interest on loan or borrowed money.
- Cost of petrol or diesel consumed in vehicles used in business.
- Cartage, freight, octroi duty, payment of insurance on the sale-able goods, and cost of transportation.
- Expenses related to service charges associated with motor vehicles.
- Expenses incurred in order to conduct ordinary business activities and business administration such as printing charges, postage, insurance, rent, salaries, carriage on the sale able goods, postage, wages related to manufacturing expenses, legal expenses, commission, cost incurred for advertisement and free samples and more.
Breaking down of Revenue Expenditure
Revenue expenditures are all such expenditures that are necessary for generating revenues for one specific accounting year and the benefits extracted from such expenditures are not expected to spill over to the coming accounting year.
These types of expenses are not considered for valuing assets because they do not deliver any kind of future benefit. Here, it is required to remember that asset is something which has the ability to provide future benefits to a company or the individual who owned such an asset. Revenue expenditures do not offer any kind of monetary benefit to the company and due to this reason, these kinds of expenditures are expensed as well as reported through the company’s income statement.
Due to the incapability of providing any kind of monetary benefit to the company revenue expenditures are not being capitalised and reported through a company’s balance sheet.
A clear example of such expenditure is the additional cost which is attached to an asset (fixed asset) such as machinery. In a manufacturing company, there are a number of fixed assets (machines) found which use to assist the company to continue manufacturing process.
Some of the machines are required to be properly lubricated and cleaned on a regular basis. These types of costs do not really add value to such machine but improves its productivity and to some extent longevity too. For keeping the equipment or machine running, these kinds of lubrication and cleaning are necessary. In order to lubricate and clean machines, a company uses to incur money at a regular interval which constitutes an expense for the company and such expenses are treated as revenue expenditures.
The reason behind such name of these kinds of expenditure comes from the requirement of such expenditures i.e. to accelerate or continue the revenue generation process or activities of a company by using such an asset.
Another common example of a cost that is non-value adding in nature is painting. A company often found painting its machines to make them look good as due to regular use, dirt and dust machines are found having rust. Over the years, machines such as drill presses and lathes tend to corrode and rust.
In terms of keeping them operational, a company’s managers generally schedule these kinds of machines to be sandblasted, repainted, assembled and disassembled. The entire modification process of these machines does not add value (not a single value) to the machines but it is required just because of keeping them productive. These types of tasks just maintain the integrity of machines and keep them away from rusting.
The above mentioned revenue expenditures in relation to machines stand in sharp contrast to improvements. Improvements of machines are done by incurring expenses on them by means of the actions like sandblast, repaint, assemble and disassemble that improve the useful life as well as the performance of such machine actually.
The actions responsible for constituting revenue expenditures are not only required for keeping the asset productive or operational but also they use to extend the asset’s or machine’s operational life. Improvement or betterments of an asset is usually capitalised and then added to the cost of the respective asset on the company’s balance sheet.
After that, these kinds of betterments are depreciated over some years instead of being expensed like the revenue expenditures immediately. This is how revenue expenditures and capital expenditures differ from each other.
Numeric Example of Revenue Expenditure
It is assumed here, that a business organisation has incurred $100,000 as capital expenditure of for installing high quality and highly productive machine. The installation of such new machine needs routine repair and maintenance of $4,000 per month and this $4,000 is required to be treated as revenue expenditure for the company.
It needs to be reported by the company through its income statement prepared on a monthly basis. Therefore, such expense must be matched with the revenues earned by the company on a monthly basis. The cost of normal repairs and maintenances to the pieces of pieces of machinery are also considered as revenue expenditures since the expenditures are not able to make the machines more than they are i.e. does not able to add any kind of value to it.
Moreover, it does not extend the useful life of the machines. Due to this, normal repairs and maintenances are also reported by a company through its income statement as expenses incurred during an accounting period exactly when these are made.
Types of Revenue Expenditure
Revenue expenditures are the costs that are charged to expenses as soon as such costs or expenses are incurred by a company. While doing so, the matching principle is used by a company in order to create a link between the expense it has incurred and the revenues it has generated during the same accounting period.
It yields income statement related results in a most accurate manner. By considering the purpose of expenditures, revenue expenditures are categorised into two different sets of expenditures such as expenses incurred for –
- Maintaining an asset that generates revenue for a company. This kind of expenses includes expenses on repair and maintenance because this particular types of expenses are incurred for supporting current operations of a company only, not to extend the useful life of the asset or not to improve it.
- Generating revenue. The expenses related to revenue generation purpose are the day-to-day expenses a company required to spend for operating its regular business activities like sales, payment for rent, salaries, purchase of utilities and office supplies.
Expenses that do not fall in the above two categories should not be considered as a company’s revenue expenditures. This is because the other expenses, not belong to the above mentioned two categories, are associated with the process of generating future revenues or monetary benefits for a company.
For instance, the amount incurred for purchasing an asset is categorised as capital expenditure. It is charged as expense over a number of accounting periods to link the expense incurred for purchasing such asset or the asset’s cost against more than one future accounting periods of revenue generation. The expense incurred for purchasing the asset is called capital expenditure. Other than this kind of capital expenditure is required to be considered as revenue expenditure.
Moreover, by nature, revenue expenditure is also be classified in direct and indirect expenses. Direct revenue expenditures arise from the expense incurred for purchasing raw material required for manufacturing final products or services.
The other examples of direct expenses are wages to labour, cost of electricity and power, rent, commission, shipping cost, legal expense and more. On the other side, indirect revenue expenditures include expenses that occur indirectly and are generated for having a connection with selling of products or services and their distribution. The examples of indirect expenses include depreciation on assets, repair, and maintenance cost, etc.
Principles required to be followed for considering an expense as Revenue Expenditure
Any kind of expenditure that provides benefits to the business just for a single accounting year is required to be considered as revenue expenditure. An expenditure that is incurred in a recurring manner i.e. for again and again is treated as revenue expenditure e.g. expense related to repair and maintenance of motor vehicles, heavy machinery which is done at a regular interval.
The elements of expenditures incurred for keeping a company’s or going concern’s business activities are treated as revenue expenditures. The expenses that are responsible for reducing the net income of a company by taking part in the company’s regular operating expenses are needed to be considered as revenue expenditures. Revenue expenditures need to be charged to a reporting company’s expense for the current accounting period, or for shortly thereafter.
These kinds of expenditures are assumed to be made within or for a very short-term period. Revenue expenditures do not constitute a large expense for a company like capital expenditures. However, some large expenditures are considered as revenue expenditures if they are directly related to a company’s sales transactions or period costs.
Key Points on Revenue Expenditures
Revenue expenditure is an expense that occurs regularly while conducting day-to-day business activities.
- These expenditures are incurred for short term purpose.
- These are not capitalized and shown through the balance sheet.
- Revenue expenses are reflected through a company’s income statement.
- These expenditures have recurring outlay.
- These are the benefits of the company incurring such expenses for the accounting year only when such expenses are incurred.
- These expenses maintain the earning capacity of a company.
- These expenses are linked with the revenue receipts
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