Revenue Expenditure

Revenue expenditure can be understood as the recurring expense that a business has to bear within a fixed period; generally with the frequency of a period less than one year. These expenditures are taken into consideration in the income statement of the company. They are deducted from the total revenue earned, which gives us the net income or profit earned. For example, imagine you own a production unit and incur some depreciation costs like repairing current machinery for better functioning; thus, this depreciation cost or maintenance expenditure can be called revenue expenditure. 

Revenue expenditures are done in two phases:

1] During the production of goods – This is also known as the operational or the direct expense that your business might have to bear. These expenses are necessary to keep a business running in an unhampered state. For example, if you have a plant making chocolates, you will incur the costs required to change the raw materials into the finished goods. A certain revenue expense is incurred in this process, from buying the raw products to the wrappers and boxing them up. This operational expense can be termed as Opex or Direct Expenditure. 

2] While you are focusing on sales– After your product has reached showrooms or shops, you might incur some percentage of the cost to either provide your services or to sell your products effectively. Salaries to the employees, taxes, depreciation costs, etc., can be considered examples of such expenses. The cost one needs to procure after the finished product is called indirect or sales cost. 

We can simply state that the revenue expenditure occurs even on the fixed assets. It implies that the expenses would primarily be focused on the maintenance of the assets, the machinery and repairing, and the rent and supplies. 

Revenue expenditure examples

Some of the common examples of revenue expenditure are:

• Salaries of the employees – For the functioning of the production unit or the business, the wages are to be paid monthly to the employees. This is a kind of revenue expenditure. 

• Rentals – If you have your business at a place that you have rented, then it would be imperative for you to pay the rent at a particular given time so that the company can run. This rent amount comes under revenue expenditure. 

• Maintaining existing assets– During the depreciation of any machinery, the maintenance and repairing cost is required so that the production or business continues without interruption. The expenses for this also come under revenue expenditure.

• Necessities – electric bills, phone bills, etc., are necessary expenses for a company’s proper functioning. 

• Unnoticed expenses – While running a business, many resources might be required for things that are to be done after the finished goods are produced. Thus, such expenses are also deducted from the revenue.

It is often misunderstood that the revenue expenditure boosts the profit earning. On the contrary, revenue expenditure is strictly related to the expenses incurred for the business’s operations to continue without disturbance. These are short-term expenses that a company is supposed to incur. 

Significance of Revenue Expenditure

It acts as a check for businesses. The proper management can help the companies reduce their working expenses which might, in turn, provide them with more profit. 

If few expenses are ignorable and unnecessary, the cost analysis via revenue expenditure can help keep them in check. 

For example: 

Total revenue of a company – 30,00,000 

Revenue expenditure – 15,00,000

Gross profit – 15,00,000

This indicates that the revenue expenditure is high, and if it can be lowered, the profit earned by the company will increase. Thus, you cannot eliminate the revenue expenditure as it is inevitable, but you can manage it well for better returns. 

Conclusion

We can say that revenue expenditure consists of everyday expenses that a company or business must bear to keep functioning. These expenditures are made for short–term duration and are reflected under the income statement. The benefits of this expenditure are also short-term and recurring. To incur more profits, the company can reduce or manage its costs for better efficiency.