Definition: Revenue Expenditure, also known as Operating Expenses or OpEx refers to the expenditure incurred in the course of the day-to-day business activities i.e. in the production of goods and services and its sale, which facilitates revenue generation of the company.
Such expenses do not increase the profit earning capacity of the business, rather it helps to maintain the operational ability of the business and also to maintain the assets in their current working condition.
It must be noted that the benefit derived from such expenses do not extend beyond one accounting period, i.e. the company can enjoy the benefits of such expenses for that particular period in which it is incurred. It is not carried forward to future years.
Examples of Revenue Expenditure
- Salary and Wages
- Carriage of Goods
- Rent and rates of factory or office building
- Interest on borrowed capital
- Depreciation on fixed assets
- Cost of Goods Sold
- Consumable stores
- Electricity bill
- Transportation Cost
- Repairs and Maintenance of Machinery (oiling, cleaning etc.)
- Raw material, work-in-progress, and finished goods
- Cost incurred for the upkeep of assets
- Taxes and Legal Expenses
- Insurance Premium
Revenue Expenditure appears in the Income Statement (Profit & Loss Account), as it generates benefits to the entity for that particular accounting year, in which it took place. Hence, they are charged to the income statement in the same accounting year
Factors Determining Revenue Expenditure
There are certain factors on the basis of which expenditure is considered as Revenue Expenditure, given as under:
- Nature of Business: When a company trades in computer systems and its parts, it is considered as inventory for that firm and the cost of buying such inventory is a revenue expenditure. But for the rest of the companies, it is a capital expenditure, as it is going to assist the firm in generating revenue for years.
- Recurrence: When the expenditure takes place, multiple times in an accounting year, then also the expense is considered as revenue expenditure.
- Purpose: The revenue expenditures are made on purchasing the inventory for the purpose of resale and not for the purpose of personal use or office use. The expenditure is also incurred to buy raw material to convert the same into finished goods and selling them to customers.
- Maintenance: If the firm incurs expenses for the normal upkeep of the asset and not to increase its productive capacity, it is regarded as revenue expenditure. Any expenses incurred with the aim of improving its useful life or earning capacity of the asset comes under capital expenditure.
- Revenue Generation: If the expenses made by the firm helps in the generation of revenue for the current accounting period, it is considered as an operational expense. Furthermore, as per the matching principle, the expense should be matched with the revenue earned during the period, to be regarded as revenue expenditure.
- Amount Spent: The amount spent as revenue expenditure is comparatively small and the benefit obtained is for a limited period only, i.e. one year or less.
In a nutshell, Revenue expenditure is nothing but the regular cost incurred which assists the firm in smooth running the business i.e. to sustain its business operations. However, it will not add any value to the assets or reduces a liability but it helps to earn revenue for the current period.
The benefits of such expenses can be derived in the same accounting year, as they last for a year only. Further, they are allowed to be deducted for tax purposes in the accounting period in which they are spent, as their incurrence is quite frequent.