Friday, 5 July 2013

Revenue expenditure

Revenue expenditure is expenditure concerned with the costs of doing business on a day to day basis. When companies make a revenue expenditure, the expense provides immediate benefits, rather than long term ones. This is contrasted with capital expenditures, which are long term investments intended to help a business grow and thrive.

 : A revenue expenditure is a cost that you charge to expense as soon as you incur it. By doing so, you are using the matching principle to link the expense incurred to revenues generated in the same accounting period. There are two types of revenue expenditure:
  • Maintaining a revenue generating asset. This includes repair and maintenance expenses, because they are incurred to support current operations, and do not extend the life of an asset or improve it.
  • Generating revenue. This is all day-to-day expenses needed to operate a business, such as sales, rent, office supplies, and utilities.
Other types of costs are not considered to be revenue expenditures, because they relate to the generation of future revenues. For example, the purchase of a fixed asset is categorized as an asset and charged to expense over multiple periods, to match the cost of the asset against multiple periods of revenue generation. These expenditures are known as capital expenditures.

 Expenditure which is not for increasing the value of fixed assets, but for running the business on a day to day basis, is known as revenue expenditure.
It is sometimes said that businesses have to spend money to make money. Businesses use their revenues both to amass capital which can be used in the long term, and to cover immediate expenses. Revenue expenditures include things like maintenance, wages and salaries, and costs for utilities. The revenue expenditure consists of expenses which must be covered immediately to keep the business running and which provide immediate benefits.

Companies break their expenses into revenue expenditures and capital expenditures so that they can see how they are using their funds and they can assess whether or not they are operating efficiently and effectively. Routinely high revenue expenditure can make it difficult for a business to build up capital, which means that it cannot make long term investments and it may not be prepared in the event of a crisis situation. For example, if a restaurant is spending most of its earnings compensating employees, paying suppliers, and performing maintenance, it may be in trouble if the freezer system goes down and needs to be replaced.
At times, a calculated capital expenditure can cut down on revenue expenditure. To borrow the restaurant example again, the owners might sit down and realize that buying a building in which to operate would be cheaper than renewing a lease. Thus, they might make the decision to expend capital for that purchase in the interests of cutting down operating costs and establishing a long term presence. The new building will also be an investment itself; the restaurant now has an asset it can sell or rent if it needs to.

Certain revenue expenditures may be deductible for tax purposes. It is recognized that a portion of business revenue applied to immediate expenses should not be taxed and business can claim such expenses as deductions. For example, a business is not required to pay taxes on the money it uses to pay payroll taxes. The rules for deductions are very complex and for a large business it may be necessary to consult an account to get accurate information and advice so that taxes will be filed properly.

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