incurring

RevenueExpenditureFull

Explanation

Behindthefinancialsuccessofeverybusiness

organisation,whetheritissmall,mediumor

largeisoperationscaleandsize,revenueplays

trevenue,every

businessnotonlyfailstostayinthemarketby

continuingitsregularbusinessoperationsbut

alsofailstoconductitsactivitiesrelatedto

businessoperations.

Revenuealsoreferredtosalesfortheprofit-

evolume

oramountofcashacompanyustobringinor

e

perspectiveofaccounting,revenueconsistsof

theamountcollectedbyacompanyfromthe

customersafterllingproductsorrvicesto

them.

UnderstandtheimportanceofRevenue

Revenuecalledthelife-lineofeverybusiness

stheprofit-making

businessorganisations,revenuealsostandsas

themostimportantelementfornon-profit

becaurevenueis

theonlyelementthatnotonlyacceleratesan

organisation’soperationsbutalsoensuresits

existencebyensuringthemovementofits

organisationalactivitiesonaregularbasis.

Customersaretheultimateursofthe

productsandrvicesacompanyusto

produceordeliverandtheyutogetsuch

productsorrvicesfromtheproducercompany

inexchangeofmoneythatconstitutesrevenue

rtoensure

revenue,acompanyustoincuranumberof

expensorexpenditures.

WhatisExpenditureanditlements

Expenditures,asincurredbyabusiness

organisationareclassifiedintotwogmentsof

expenditure,thefirstoneisrevenueexpenditure

andthecondoneiscapitalexpenditure.

Oneofthecrucialelementsofexpenditure

incurredbyacompanyisrevenueexpensor

eexpenditures

aretheextraexpensincurredbyacompany

becauanyofitsast,buttheydonot

increatheufullifeofsuchastorit

productivityoraddanykindofadditionalvalue

tothatast.

Allsuchexpendituresareconsideredas

revenueexpendituresthatarenecessaryfora

companytoincurinordertogeneratebusiness

revenuesforaspecificaccountingperiodand

thebenefitsofsuchexpendituresarenot

theotherhand,capitalexpendituresarethekind

ofexpendituresthatdeliverbenefittoacompany,

whichincurssuchexpenditures,foranumberof

futureyearsormorethanoneaccountingperiod.

Revenueexpendituresarenotreflectedthrough

acompany’sbalancesheetbutarereflected

the

revenueexpenditures,thoareexpendout

intheparticularfinancialperiodexactlyinwhich

theyareincurred,capitalexpendituresare

capitalidonthecompany’sbalancesheet.

Oneofourfinanceexpertsassistingstudents

withpersonalfinancehomeworkexplainsthe

conceptofrevenuesbelow:

WhatisRevenueExpenditure?

Definition(s)ofRevenueExpenditure(s)with

Example

Revenueexpenditureisalsoknownasincome

ypeofcostwhich

isrelatedtoacompany’sastanditisnot

capitalidbecauofitsincapabilityof

providingfuturefinancialbenefittothecompany.

Insomeotherwords,thistypeofexpenditure

referstotheextraexpenincurredbya

companyduringaspecificfinancialyear

becauofaparticularast.

Revenueexpendituresarenotsomethingthat

canaddadditionalvaluetoanastoradd

moreufullifetoitorincreaitsproductive

indsofexpensarenot

consideredforaddingthemintheasts’book

valuebecauoftheirinabilitytodrawfuture

benefitsforthecompanythoughtheastsfor

whichsuchexpendituresareincurredare

somethingthatprovidesfuturebenefitsfora

company.

Revenueexpendituresareattachedtoastsas

wellaxpendituresthataremadebya

companyforconductingitsregularbusiness

rwords,the

expenditureswhichareincurredbyacompany

formeetingitsdailybusinessrequirementsare

expendituresimpoashort-termeffectona

,thebenefits

relatedtothekindsofexpendituresare

enjoyedbyacompanywithinthesame

accountingyearwhentheareincurred.

Revenueexpendituresarealsocalledas

‘expiredcostsorexpens.’Examplesof

revenueexpendituresincludeexpensrelated

topurchasingofgoods,postages,rent,payment

ofsalaries,stationerypurchad,traveling

expens,paymentofwagesonproducts

purchadandmore.

Revenueexpendituresstandasthesumof

expensthatacompanyincursduringthe

productionofproductsorrvicesthathelpsitto

acceleratetherevenuegenerationprocessina

nythat

incursthetypesofexpendituresonthe

rvicesoritemsthatareufultoitbutare

ud-upwithinlessthanayearincreasthe

company’sprofit-makingcapacitytemporarily.

Alongwiththeabovestatedexamples,revenue

expendituresalsoincludetheexpensincurred

forpurchasingrawmaterial,storagesasmuch

asrequiredforconductingmanufacturing

practicesinordertomanufacturesaleable

goodsorrvices.

Inalsoincludetheexpenmadefor

maintainingfixedaststoensuretheirworking

conditionssuchasrepairandmaintenance

expensinrelationtomachinery,furniture,

building,andanyotherfixedast.

Followingaresomeoftheotherexamplesofa

company’srevenueexpenditure:

Paymentofwagestothefactoryworkers.

Costofoilrequiredforlubricatingmachines.

Costofpowerorelectricityrequiredforrunning

amotorormachine.

Baddebts.

Repairsandmaintenancerelatedtoevery

expenincurredforimprovingfixedasts.

Costofgoodsthataresale-ableinnature.

Depreciationexpensrelatedtothefixed

astsutilizedbyacompanyforconducting

regularbusinessoperationsofmanufacturing.

Interestonloanorborrowedmoney.

Costofpetrolordielconsumedinvehicles

udinbusiness.

Cartage,freight,octroiduty,paymentof

insuranceonthesale-ablegoods,andcostof

transportation.

Expensrelatedtorvicechargesassociated

withmotorvehicles.

Expensincurredinordertoconductordinary

businessactivitiesandbusinessadministration

suchasprintingcharges,postage,insurance,

rent,salaries,carriageonthesaleablegoods,

postage,wagesrelatedtomanufacturing

expens,legalexpens,commission,cost

incurredforadvertimentandfreesamplesand

more.

BreakingdownofRevenueExpenditure

Revenueexpendituresareallsuchexpenditures

thatarenecessaryforgeneratingrevenuesfor

onespecificaccountingyearandthebenefits

extractedfromsuchexpendituresarenot

expectedtospillovertothecomingaccounting

year.

Thetypesofexpensarenotconsideredfor

valuingastsbecautheydonotdeliverany

,itisrequiredto

rememberthatastissomethingwhichhasthe

abilitytoprovidefuturebenefitstoacompanyor

theindividualwhoownedsuchanast.

Revenueexpendituresdonotofferanykindof

monetarybenefittothecompanyandduetothis

reason,thekindsofexpendituresare

expendaswellasreportedthroughthe

company’sincomestatement.

Duetotheincapabilityofprovidinganykindof

monetarybenefittothecompanyrevenue

expendituresarenotbeingcapitalidand

reportedthroughacompany’sbalancesheet.

Aclearexampleofsuchexpenditureisthe

additionalcostwhichisattachedtoanast

(fixedast)

manufacturingcompany,thereareanumberof

fixedasts(machines)foundwhichuto

assistthecompanytocontinuemanufacturing

process.

Someofthemachinesarerequiredtobe

properlylubricatedandcleanedonaregular

ypesofcostsdonotreallyadd

valuetosuchmachinebutimprovesits

productivityandtosomeextentlongevitytoo.

Forkeepingtheequipmentormachinerunning,

thekindsoflubricationandcleaningare

rtolubricateandclean

machines,acompanyustoincurmoneyata

regularintervalwhichconstitutesanexpenfor

thecompanyandsuchexpensaretreatedas

revenueexpenditures.

Thereasonbehindsuchnameofthekindsof

expenditurecomesfromtherequirementofsuch

lerateorcontinuethe

revenuegenerationprocessoractivitiesofa

companybyusingsuchanast.

Anothercommonexampleofacostthatisnon-

ny

oftenfoundpaintingitsmachinestomakethem

lookgoodasduetoregularu,dirtanddust

eyears,

machinessuchasdrillpressandlathestend

tocorrodeandrust.

Intermsofkeepingthemoperational,a

company’smanagersgenerallyschedulethe

kindsofmachinestobesandblasted,repainted,

ire

modificationprocessofthemachinesdoes

notaddvalue(notasinglevalue)tothe

machinesbutitisrequiredjustbecauof

ypesoftasks

justmaintaintheintegrityofmachinesandkeep

themawayfromrusting.

Theabovementionedrevenueexpendituresin

relationtomachinesstandinsharpcontrastto

ementsofmachinesare

donebyincurringexpensonthembymeans

oftheactionslikesandblast,repaint,asmble

anddisasmblethatimprovetheufullifeas

wellastheperformanceofsuchmachine

actually.

Theactionsresponsibleforconstitutingrevenue

expendituresarenotonlyrequiredforkeeping

theastproductiveoroperationalbutalsothey

utoextendtheast’sormachine’s

ementorbettermentsof

anastisusuallycapitalidandthenaddedto

thecostoftherespectiveastonthe

company’sbalancesheet.

Afterthat,thekindsofbettermentsare

depreciatedoversomeyearsinsteadofbeing

expendliketherevenueexpenditures

howrevenueexpenditures

andcapitalexpendituresdifferfromeachother.

NumericExampleofRevenueExpenditure

Itisassumedhere,thatabusinessorganisation

hasincurred$100,000ascapitalexpenditureof

forinstallinghighqualityandhighlyproductive

tallationofsuchnewmachine

needsroutinerepairandmaintenanceof$4,000

permonthandthis$4,000isrequiredtobe

treatedas

revenueexpenditureforthecompany.

Itneedstobereportedbythecompanythrough

itsincomestatementpreparedonamonthly

ore,suchexpenmustbe

matchedwiththerevenuearnedbythe

tofnormal

repairsandmaintenancestothepiecesof

piecesofmachineryarealsoconsideredas

revenueexpendituressincetheexpenditures

arenotabletomakethemachinesmorethan

tabletoaddanykindof

valuetoit.

Moreover,itdoesnotextendtheufullifeof

his,normalrepairsand

maintenancesarealsoreportedbyacompany

throughitsincomestatementaxpens

incurredduringanaccountingperiodexactly

whenthearemade.

TypesofRevenueExpenditure

Revenueexpendituresarethecoststhatare

chargedtoexpensassoonassuchcostsor

doingso,thematchingprincipleisudbya

companyinordertocreatealinkbetweenthe

expenithasincurredandtherevenuesithas

generatedduringthesameaccountingperiod.

Ityieldsincomestatementrelatedresultsina

ideringthe

purpoofexpenditures,revenueexpenditures

arecategoridintotwodifferenttsof

expendituressuchaxpensincurredfor–

Maintaininganastthatgeneratesrevenuefor

ndofexpensincludes

expensonrepairandmaintenancebecau

thisparticulartypesofexpensareincurredfor

supportingcurrentoperationsofacompanyonly,

nottoextendtheufullifeoftheastornotto

improveit.

ensrelatedto

revenuegenerationpurpoaretheday-to-day

expensacompanyrequiredtospendfor

operatingitsregularbusinessactivitieslikesales,

paymentforrent,salaries,purchaofutilities

esthatdonotfallin

theabovetwocategoriesshouldnotbe

consideredasacompany’srevenue

becautheother

expens,notbelongtotheabovementioned

twocategories,areassociatedwiththeprocess

ofgenerating

futurerevenuesormonetarybenefitsfora

company.

Forinstance,theamountincurredforpurchasing

ischargedaxpenoveranumberof

accountingperiodstolinktheexpenincurred

forpurchasingsuchastortheast’scost

againstmorethanonefutureaccountingperiods

enincurredfor

purchasingtheastiscalledcapital

hanthiskindofcapital

expenditureisrequiredtobeconsideredas

revenueexpenditure.

Moreover,bynature,revenueexpenditureis

alsobeclassifiedindirectandindirectexpens.

Directrevenueexpendituresarifromthe

expenincurredforpurchasingrawmaterial

requiredformanufacturingfinalproductsor

rvices.

Theotherexamplesofdirectexpensare

wagestolabour,costofelectricityandpower,

rent,commission,shippingcost,legalexpen

therside,indirectrevenue

expendituresincludeexpensthatoccur

indirectlyandaregeneratedforhavinga

connectionwithllingofproductsorrvices

mplesofindirect

expensincludedepreciationonasts,repair,

andmaintenancecost,etc.

Principlesrequiredtobefollowedforconsidering

anexpenasRevenueExpenditure

Anykindofexpenditurethatprovidesbenefitsto

thebusinessjustforasingleaccountingyearis

requiredtobeconsideredasrevenue

nditurethatisincurredina

inandagainis

e

relatedtorepairandmaintenanceofmotor

vehicles,heavymachinerywhichisdoneata

regularinterval.

Theelementsofexpendituresincurredfor

keepingacompany’sorgoingconcern’s

businessactivitiesaretreatedasrevenue

ensthatare

responsibleforreducingthenetincomeofa

companybytakingpartinthecompany’sregular

operatingexpensareneededtobe

e

expendituresneedtobechargedtoareporting

company’xpenforthecurrentaccounting

period,orforshortlythereafter.

Thekindsofexpendituresareassumedtobe

madewithinorforaveryshort-termperiod.

Revenueexpendituresdonotconstitutealarge

expenforacompanylikecapitalexpenditures.

However,somelargeexpendituresare

consideredasrevenueexpendituresiftheyare

directlyrelatedtoacompany’ssales

transactionsorperiodcosts.

KeyPointsonRevenueExpenditures

Revenueexpenditureisanexpenthatoccurs

regularlywhileconductingday-to-daybusiness

activities.

Theexpendituresareincurredforshortterm

purpo.

Thearenotcapitalizedandshownthrough

thebalancesheet.

Revenueexpensarereflectedthrougha

company’sincomestatement.

Theexpenditureshaverecurringoutlay.

Thearethebenefitsofthecompanyincurring

suchexpensfortheaccountingyearonly

whensuchexpensareincurred.

Theexpensmaintaintheearningcapacity

ofacompany.

Theexpensarelinkedwiththerevenue

receipts.

Revenueexpenditureisanimportantconceptof

costaccounting.