Running a profitable business and making money requires the expenditure of funds. For businesses of all shapes and sizes, investing the profits into the business again is critical to growing and succeeding in the long run. However, to get a comprehensive picture of your business finances and efficiently regulate the working capital, it is important to account for the investments you undertake in your day-to-day operational processes.
Accounting for such operating costs and knowing the income they will generate can help you eliminate cash flow troubles that might impact your business operations negatively. Besides, this is also important because when running a business, not every purchase is created equal. While some assets (such as equipment, company car, machinery, etc.) offer benefits for a year or more, other investments (such as utilities, insurance, rent, etc.) typically provide more short-term advantages.
For instance, monthly rent paid by the business enables it to continue leasing the space on which it operates for the next month. These short-term business expenses come under the category of revenue expenditure.
In this blog, we will discuss the concept of revenue expenditure, including the revenue expenditure meaning, types and examples of revenue expenditure, its significance, and more.
What Is Revenue Expenditure?
Revenue expenditure is defined as the expense that businesses use immediately (or within one year) in most cases. Also known as OPEX or revenue costs and operational expenses, revenue expenditure means a range of expenses the business requires to meet the existing operating costs.
These short-term expenditures that are employed in the current cycle or within a year involve various expenses incurred to fulfill the operational and maintenance costs of maintaining a company. Put simply, revenue expenditure refers to the charge that will come under the business expense in the same accounting period when that particular expense takes place.
Types of Revenue Expenditure
Revenue expenditure is of two main types-
● Direct Expense
Direct expense refers to the cost that occurs from raw material production to final goods and services. Put simply, expenses under this type arise through producing goods/services. Few people involved in direct payments include direct labor wages, shipping costs, freight charges, rent, commission, import duty, power, legal fees, and electricity bill.
● Indirect Expense
Indirect expenses are expenses incurred while selling and distributing the goods and services (already produced). Indirect costs include rent and taxes, commission, rent, salaries, interest, repairs, depreciation, and other miscellaneous expenses. Apart from this, indirect costs can also arise while managing the repetitive administrative operations of a business.
Example Of Revenue Expenditure
As discussed above, revenue expenditures are expected to generate direct or indirect revenue within the same accounting period, which in most cases is a year.
However, to accurately account for them, it is important to know what is and is not classified as revenue expenditure. While the concept and classification of revenue expenditure can vary significantly by industry, here we list some common examples that define revenue expenditure.
● Various selling expenses such as import duties, shipping fees, etc.
● Expenditure related to software upgrades.
● Buying goods/services meant for resale in the normal course of business.
● Buying various unprocessed materials and components used to manufacture goods.
● Different marketing expenses to either launch or promote a new product.
● Costs associated with maintaining or repairing plant and machinery.
● Rent for business premises or factory.
● The cost is associated with utilities and telecommunications.
● Salaries and commissions paid to staff.
● Cost related to interest charged on financing new equipment.
Intrinsic Value Example Explanation
Let's understand the concept of revenue expenditure better with an example-
Suppose company X spends Rs 5,000 monthly on software updates for its business. In that case, the Rs. 5,000 comes under the revenue expenditure category in that company's monthly financial statement.
Suppose another company, Y, plans to spend Rs 1000 monthly on raw materials. In that case, this amount comes under that company's monthly revenue expenditure category as it accounts for the total cost of the asset.
Besides, the total amount of the above examples (Rs. 60,000 and Rs. 12,000) can be deducted from their respective taxes in the year they pay for the said goods.
Revenue Expenditure Vs. Capital Expenditure
When it comes to the concept of business expenditure, it is very important to differentiate between revenue expenditure and capital expenditure.
While revenue expenditure is a regular business investment that neither causes any welfare in business nor leads to a loss, capital expenditure is a long-term money investment that only benefits businesses.
Here are the main differences between the two types:
|Difference||Revenue Expenditure||Capital Expenditure|
|Type of expenditure||
Revenue expenditure is a routine expenditure that occurs in the normal course of business and covers the cost of sales and maintenance of fixed assets.
On the contrary, capital expenditure is incurred in obtaining or enhancing permanent assets and is not meant for exchange. Instead, they may add value to the existing ones.
Revenue expenditures are usually made for a short term.
Capital expenditures are incurred in the long run.
Revenue expenditure in any business is consumed within an accounting year, i.e., benefits of only short-term or immediate years are of concern here. Thus, the entire amount or expense is changed into the income statement without appearing on the balance sheet.
Capital expenditure gives benefits to businesses over several years. Therefore, only small parts of income statements are subjected to change leading to deprecation, and the rest appears on the balance sheet.
Revenue expenditure maintains the earning capacity of the business.
Capital expenditure increases the earning capacity.
Revenue expenditures occur frequently.
Capital expenses incurred are non-recurring.
Significance Of Revenue Expenditure
Revenue expenditure is one of the most significant components of any business. Some of the ways revenue expenditures play an important role for any business venture include-
● Understanding the proficiency of each revenue expenditure item helps identify various cost heads indispensable for running a business.
● Revenue expenditures allow businesses to identify unnecessary expenses and make required adjustments as necessary.
● Maintaining a record of revenue expenditure equips a business to analyze better and project its operations' financial standing.
Developing a robust understanding of revenue expenditure can allow your business to identify which expenses you can rely upon for generating immediate revenue and which ones will take longer to recover or pay for themselves. This, in turn, can help businesses significantly identify and cut unnecessary expenses.