Revenue expenditure

Revenue expenditure
See also
Long-Term Assets Book profit Termination cash flow Deferred expense Gross fixed assets Nominal account Operating expense ratio Total income Annual depreciation

Revenue expenditure is the expenditure whose benefit expires within the year and is not carried forward to the next year or next years. In other words, the cost will be matched with the revenues of the accounting year in which the expenditure took place.

Meaning of revenue expenditure

Revenue expenditure does not increase efficiency of the firm. They are not added to the book value of the asset as they do not provide any future benefi. They are incurred in the normal day to day conduct and administration of a business to run the business, for example salaries, rent, taxes, postage, stationery, bank charges, insurance, advertisement charges. Revenue expenditure is also incurred to maintain the fixed assets of business in proper working condition, for example repair, replacement and renewals of building, machinery and furniture .

Examples of revenue expenditure

All revenue expenditure are charged to trading and profit and loss account. Following are examples of revenue-expenditure:

• all exenses incurred in the normal day to day conduct and administration of a business to run the business, for example salaries, rent, taxes, postage, stationery, bank charges, insurance, advertisement charges,
• expenses incurred to maintain the fixed assets of business in proper working condition, for example repair, replacement and renewals of building, machinery and furniture,
• cost of raw-material and stores purchased for manufacturing process,
• interest on loan borrowed for business,
• service to vehicle,
• petrol consumed in motor vehicles,
• bad debts.

Revenue expenditures versus capital expenditures

The classification between the revenue expenditures and capital expenditures is one of the frequent issue in the accounting literature as it has an important impact on financial statements. In other words, the difference between a capital and a revenue expenditure will result in financial statements and not fairly repr0esent the financial position of any company. It is practically difficult in some cases to draw a line between capital and revenue expenditures since a single item of expenditure sometimes can be revenue expenditure and can be a capital expenditure as well. Capital expenditures which are defined as items spent in order to help in generating profits for long period (a year or more) always appear in the balance sheet then they do not directly reduce the profit. Revenue expenditures are costs incurred for the daily running of the business such as salaries, rent, utilities, etc. Revenue expenditures go directly to the income statement in order to be charged against profit..

References

• Drazen A. (2001), Political Economy in Macroeconomics, Princeton University Press.
• Mehrara M., Pahlavani M., Elyasi Y, (2011), Government Revenue and Government Expenditure Nexus in Asian Countries: Panel Cointegration and Causality, "International Journal of Business and Social Science", Vol. 2 No. 7
• Siraj F., Abu Bakar N., Abolgasim A. (2008), Classification of Capital Expenditures and Revenue Expenditures: An Analysis of Correlation and Neural Networks, College of Arts and Sciences Universiti Utara Malaysia
• Wolde-Rufael Y; (2009), The Revenue-Expenditure Nexus: A Note of Two Cypriot Economies, "ICFAI Journal of Public Finance", Vol. 7 Issue 1, p. 7-15.

Author: Sylwia Kotysz