Types of revenue expenditure and its importance





There is always a certain amount of expenditure that is incurred on fixed assets. This expenditure could be classified into two categories which are Capital Expenditure and the Revenue Expenditure. Below, only the Revenue Expenditure would be discussed


Revenue Expenditure:

The expenditure on the fixed assets that is used for maintaining the asset rather than increasing its profit generating capacity is called the revenue expenditure. This cost is charged to the expense account as soon as the need of incurring the cost arises. The benefits from this cost could be generated in a very short period of time. In this way, it could be said that the business is following the matching principle of linking the expenses used and the profits generated in the same accounting period, yielding more precise results of the income statement. These expenses are short –term that is for the particular accounting period and, therefore, the benefits generated as a result of it are also recorded in the given accounting year. Some of the major examples of the revenue expenditure include printing and stationary cost, inventory cost, postage and insurance cost, rent, electricity and wages and maintenance cost etc. 



Example:

We can explain the procedure with the help of a simple example. Let us suppose that a company buys a biscuit manufacturing machine. For this transaction, the purchase price and the installation charges are categorized as the capital expenditure whereas all the related charges that are either involved in repairing or maintain the machinery would be classified as the revenue expenditure. The reason behind categorizing the repair and maintenance cost as revenue expenditure is that these charges are not directly involved in boosting the earning capacity of the machine but only serves the purpose of maintaining it. In other words, it could be said that the machine will produce the same amount of biscuits as it used to produce. Therefore, the revenue expenditure is indirectly related to the revenue generation and is also for a short time period.

Types of Revenue Expenditure:

The revenue expenditure is divided into two major categories.
  • ·         Maintaining the asset: This involves the repair cost and the maintenance cost as they play an indirect role in generating profits by supporting the operations of the company
  • ·         Revenue generation: The other expenses which are important to carry out day-to-day business activities such as the rent, salaries, and office supplies etc.
Besides these two types of expenses, all the other costs would be classified as the capital expenditure etc and would not be considered as the revenue expense of the company.

Entry for the Revenue Expenditure:

The revenue expenditure is not the part of fixed asset cost. Therefore, the relevant entry appears only in the income statement for the period in which it was utilized. Unlike capital expenditure, it is not recorded in the Balance Sheet.  The entry to record the revenue cost would be entered as follows:

Debit               Revenue Expenses
Credit              Cash/Payable


Importance of Revenue Expenditure:

Many times the companies mix the capital and revenue cost but a clear cut distinguish between the capital and revenue expenditure is important to run a business successfully and to your company from the unnecessary troubles. Revenue expenditure is the only cost that could be legally deducted under the Income Tax Assessment Act 1997. In other words it could be said that whenever a business profit is subjected to the deduction of the Income Tax, it is only legally allowed to deduct the Revenue expenses from that profit which in return also results in reducing the amount of tax to be paid. In other case, the business income subjected to Income Tax would be comparatively higher. 
The companies should understand the need of making a clear difference in capital and revenue cost and should remember to incur all the revenue cost involved in the day-to-day activity in the same accounting year in which it was made.

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Examples of Revenue Expenditure and Capital Expenditures



Following are the examples of revenue expenditure.
  1. Wages or salaries paid to factory workers.
  2. Machine Oil to lubricate.
  3. Electricity or Power required to run machinery or motor.
  4. Expenditure incurred in the ordinary conduct and administration of business, i.e. rent, , carriage on saleable goods, salaries, wages manufacturing expenses, commission, legal expenses, insurance, advertisement, free samples, postage, printing charges etc.
  5. Repair and maintenance expenses incurred on fixed assets.
  6. Cost of saleable goods.
  7. Depreciation of fixed assets used in the business.
  8. Interest on borrowed money.
  9. Freight, cartage, octroi duty, transportation, insurance paid on saleable goods.
  10. Petrol or diesel consumed in motor vehicles.
  11. Service charges to motor vehicles.
  12. Bad debts. 

The following are the capital expenditures Examples:
  • Cost of goodwill.
  • Cost of freehold land and building and the legal charges incurred in this connection.
  • Cost of lease.
  • Cost of machinery, plants, tools, fixtures, etc.
  • Cost of trade marks, patents, copy rights, designs, etc.
  • Cost of car, lorry etc.
  • Cost of installation of lights and fans.
  • Cost of any other assets acquired by way of equipment.
  • Erection cost of plant and machinery.
  • Cost of addition to existing assets.
  • Structural improvements and alteration in the existing assets.
  • Expenses for developments in case of mines and plantations.
  • Expenses for administration incurred during construction and equipment of any industrial enterprise.
  • Expenses incurred in experimenting which finally result in the acquisition of a patent or other rights.

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