Revenue expenditure definition
/What is a Revenue Expenditure?
A revenue expenditure is a cost that is charged to expense as soon as the cost is incurred. By doing so, a business is using the matching principle to link the expense incurred to revenues generated in the same reporting period. This yields the most accurate income statement results. There are two types of revenue expenditure, which are noted below.
Maintaining a Revenue Generating Asset
The maintenance of a revenue generating asset 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
Expenditures associated with revenue generation include all day-to-day expenses needed to operate a business, such as sales salaries, rent, office supplies, and utilities. These are also known as period costs, because they are direct associated with the period in which they were incurred.
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Types of Revenue Expenditures
There are many examples of revenue expenditures. The more common ones are included in administrative overhead, such as administrative compensation, rent, utilities, property taxes, and business travel. Another type of revenue expenditure is all costs related to research and development, since the major accounting frameworks (such as generally accepted accounting principles) do not allow these costs to be capitalized.
Presentation of Revenue Expenditures
Revenue expenditures are stated within the lines items of the income statement. They are included below the sales figure, which appears at the top of the income statement. Revenue expenditures may be included within the cost of goods sold section or the operating expenses section of the statement. These expenditures are netted against sales to arrive at the net income figure at the bottom of the income statement.
The Nature of Capital Expenditures
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 future periods of revenue generation. These expenditures are known as capital expenditures.
Types of Capital Expenditures
Capital expenditures are classified within several standard types of fixed assets. These classifications include buildings, computers, furniture and fixtures, leasehold improvements, machinery, software, and vehicles. The exact classification within which a capital expenditure falls depends on the nature of the purchase, its useful life, and the amount involved.
Revenue Expenditures vs. Capital Expenditures
The essential difference between revenue expenditures and capital expenditures is the time period over which the expenditure is expected to be consumed. Revenue expenditures are consumed over the short term, while capital expenditures are consumed over the long term. This means that revenue expenditures are charged to expense immediately, while capital expenditures are charged to expense through depreciation over a period of several years. Another difference between the two concepts is that revenue expenditures are intended for the production of revenue right now, while capital expenditures are used for the production of revenue over a longer period of time, through the operation of fixed assets. A further difference is that revenue expenditures tend to be substantially smaller in size than capital expenditures.