Revenue Expenditure & ExamplesDefined with Examples & More
Revenue Expenditure is the company’s day-to-day expenses incurred within one accounting period to produce its products and services that will help in the revenue-generating activities of the company.
The two significant expenses related to the business operation is the cost of sales and operating expense.
For a manufacturing company, the Cost of Good Sold is a cost that is directly involved in manufacturing the product.
In a Retail Store, the Cost of Sales is the cost incurred in selling the inventories ready for a re-sale.
Operating Expense is an expense incurred related to running the business’s daily operations.
The recording of the Cost of Sales and Operating Expenses should be during the same accounting period when the relative sale is generated.
Examples of Revenue Expenditure
Revenue expenses are incurred related to the company’s daily operations.
They are line items in the Income Statement for which they are a regular occurrence to produce a product or an item ready for resale.
The recording revenue expenditures in the books are in the same accounting period in which they are incurred.
Repair and Maintenance of the Assets
The cost incurred in repairing or maintaining an asset used in the primary business operation is part of the revenue expense.
These expenses primarily support the company’s operations until it generates revenue.
Wages Paid to Factory Workers
It is a labor expense incurred by the company from hiring employees to work in the different departments to be able to generate income.
Utility Expenses
These expenses are significant to achieve and prevent any hiccups in the business operations like the incurrence of electric bills, water bills, transportation expenses, telephone bills, etc.
Selling Expense
Even though the product is produced as planned, without the company’s selling strategy, the goods will not be able to reach the end user without proper product establishment.
Selling expenses are regularly incurred to promote, market, and advertise the company’s products.
Rent Expense
To properly operate, the business needs a place to conduct its daily transactions.
If a company does not own an office it can rent out a space or a building.
The monthly dues they need to pay for renting out the place are recognized as rent expenses, and they form part of the revenue expense.
Other Expenses
There are other operation-related expenses a company may incur.
They are recognized as other expenses when their definition does not fit the mentioned revenue expense above.
Practical Examples
P-E-N Ltd. is a pen manufacturing company.
Since the company is incurring various expenses, they want every type of expense accounted for properly.
The expenses incurred for the current accounting period are manufacturing costs, salaries, utility bills, repair and maintenance, and asset acquisition are all treated as revenue expenses.
If the company acquires new assets to improve its production capacity and process, extend the asset’s useful life, etc., the cost of a new purchase is classified as a capital expenditure.
Another example is Letters Ltd., which manufactures and sells baked goods.
It acquired machinery for bread production.
Because of different incurred expenses, the management argues where to account for such expenses.
The acquisition cost for the new machinery, other related costs like bringing the machine to production, and even the installation cost are treated as capital expenditure because the nature of the asset is to contribute to the company earnings for future accounting periods.
The succeeding costs related to the acquired machinery such as repair and maintenance costs are treated as revenue expenditure because they will not increase the benefit it provides for the company.
It will not increase the production capacity, but it will still produce the same product quality and will not increase the machine’s useful life.
The initial acquisition of machinery is treated as a capital expenditure while the subsequent cost to repair or maintain the asset is treated as a revenue expense.
Types of Revenue Expenditure
The two types of revenue expenditure are direct and indirect expenses.
Direct Expense
These expenses directly participate in producing the product like raw materials, labor costs, utility bills, legal expenses, etc.
Indirect Expense
These expenses are significant to be able to reach the product to interested consumers.
The classification of these expenses are selling and administrative expenses, like marketing/advertisement costs, salaries of employees, depreciation, etc.
Conclusion
Revenue expenditures are day-to-day operation-related expenses.
The accounting treatment for these types of expenses is “expense as incurred”, meaning, at the time of incurrence of these expenses, whether paid or not, should be accounted for in the same accounting period.
Revenue expense is a line item in the Income Statement.
These expenses are subdivided into two categories – the maintenance cost of the revenue-generating assets and the cost incurred to generate revenue.
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Cornell University "Revenue vs. Expense Reimbursement" Page 1 . October 26, 2022