Revenue expenditure

Revenue expenditure
See also
Prepaid income Non-operating expense Nominal account Trade receivables Cost principle Matching principle Temporary account Fictitious asset Normal cost

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..

Advantages of Revenue expenditure

Revenue expenditure can provide numerous advantages to an organization. These advantages include:

• Improved cash flow: Revenue expenditure allows for the organization to have more control over cash flow, allowing them to quickly purchase necessary resources and services, as well as reduce debt.
• Increased efficiency: By allowing for quick access to resources, revenue expenditure can help improve the efficiency of operations and increase the organization's productivity.
• Improved customer experience: Revenue expenditure can help provide better customer service, thereby improving the customer experience and creating a better relationship with customers.
• Increased profits: By improving the efficiency and cash flow of an organization, revenue expenditure can lead to increased profits.
• Increased flexibility: Revenue expenditure provides the organization with more flexibility and control over their budget, allowing them to quickly and effectively respond to changing market conditions.

Limitations of Revenue expenditure

Revenue expenditure is an important factor for any business, however there are some limitations that come with it. These include:

• It does not create any asset or provide long-term benefits. Revenue expenditure is used for current expenses such as wages, salaries, rent, insurance, etc. It does not increase the value of the business as it is spent on things that are consumed in the current year.
• Revenue expenditure is not tax deductible. This means that companies cannot deduct the cost of revenue expenditure from their taxes, resulting in higher taxes.
• Revenue expenditure can be difficult to track and manage as it is spent on multiple areas with no tangible asset or benefit to show for it. This makes it hard to measure the impact of the expenditure and to monitor budgets effectively.
• It can be difficult to budget for revenue expenditure as it is often unpredictable and can fluctuate significantly from one year to the next. This makes it difficult to accurately predict how much should be spent and when.

Other approaches related to Revenue expenditure

• Introduction:

Aside from the traditional definition of revenue expenditure, there are several other approaches used to define the concept.

• Matching principle:

The matching principle states that expenses should be matched with the revenues earned in the same period. This approach allows for expenses to be recorded in the same period as the associated revenue.

• Cash Basis Accounting:

Cash basis accounting is an approach that records transactions only when cash is exchanged. This approach allows for expenses to be recorded when the cash is spent and not when the expense is incurred.

• Accrual Basis Accounting:

Accrual basis accounting is an approach that records expenses when they are incurred, regardless of when cash is exchanged. This approach allows for expenses to be recorded when the goods or services are received, not when the cash is exchanged.

• Capital Expenditure:

Capital expenditure is an expense used to purchase assets or investments that will provide benefits in the future. This approach excludes expenses that are used to purchase goods or services that will be consumed in the current period.

Summary:

The traditional definition of revenue expenditure is an expense that is used to purchase goods and services that will be consumed in the current period and not carried forward to the next. However, there are several other approaches used to define the concept, such as the matching principle, cash basis accounting, accrual basis accounting and capital expenditure.

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