short-term expenses that won't lead to asset creation but still essential in running a company.
Revenue Expenditure Details
Revenue expenditure is more widely known as operating expenses. Operating expenses represent expenses incurred from daily business operations. Some examples of revenue expenditure include wages, commissions, electricity cost, repair cost, and maintenance cost. All of these expenses are important for a business to continue being operational. However, none of them necessarily improve the level of assets a company has (they don't increase the number of assets, prolong the useful life, or upgrade them).
Companies use their revenue expenditure in less than one year and need to continuously budget for revenue expenditure. However, the Internal Revenue Service (IRS) permits businesses to deduct tax liability from revenue expenditure. To put it simply, the inclusion of revenue expenditure effectively lowers a company's net income, thus lowering the firm's taxable income.
Companies trying to lower tax expenses may look for ways to make revenue expenditure appear as big as it reasonably could, e.g., increasing the value of depreciation. That said, potential investors also consider net income when deciding which business they invest in.
Revenue Expenditure Example
On an income statement, firms usually list revenue expenditure as operating expenses. The expenses are further divided into subcategories. Let's look at hypothetical company A. At the beginning of the quarter, they allocated $15,000 for revenue expenditure. They have broken down their revenue expenditure as:
- General & Administrative Expenses: $5,000
- Selling Expenses: $2,500
- Depreciation and Amortization: $300
- Cost of Goods Sold (COGS): $7,000
Company A's total revenue expenditure for this period is $14,800. They came close to using their expenditure budget but still made it under. Next quarter, they will allocate a little more.
These subcategories make the income statement more readable. Imagine if accountants write all of the individual accounts—like salaries, rent, and miscellaneous expenses—as-is. It will only clutter the report.
Types of Revenue Expenditure
A lot of things can be revenue expenditure, but some are more common than others. General and administrative expenses (G&A) refer to expenses not specifically related to specific segments of a company, like manufacturing and sales, but the whole organization. Some examples include rent, office supplies, and insurance premiums.
Another common revenue expenditure is depreciation and amortization. Deprecation is a method of allocating a physical/tangible asset's cost over its useful life. Spreading of the cost of a purchased car over ten years, for example. Amortization is similar to depreciation, but it's used for intangible assets instead (e.g., trademarks and copyrights).
Selling expenses refer to all costs related to marketing and selling goods or services. The expenses are made up of advertising costs, store displays, and delivering goods, among others. COGS is the direct cost of producing or manufacturing goods, e.g., labor wages and material costs. Finally, there are other expenses not belonging to any of the four categories: budget for research and development, taxes, and interests.
Revenue Expenditure vs. Capital Expenditure
Revenue expenditure is vastly different from capital expenditure, which is long-term investments or expenses that grow a company. Revenue expenditures are recurring costs, meaning companies need to pay for them regularly. Meanwhile, capital expenditures are one-time purchases, fixed assets (long-term physical property or equipment). Some examples of capital expenditure are a new piece of equipment, buildings, vehicles, and lands.