Revenue expenditure or operating expenses constitute those costs which do not lead to asset creation. Under normal circumstances, operating expenses are incurred through business operations. Regardless, business entities must learn to manage such expenses to ensure profitability and sustainability of their business venture.
In this article
What is Revenue Expenditure?
Revenue expenditure meaning can be defined as the summation of all expenses incurred by a business through the course of production of its goods and services. They are considered significant for generating revenue in a given accounting period.
It must be noted here that revenue expenditure does not boost the profit-generating capacity of a business. However, it comes in handy in maintaining the operational activities and helps to manage assets better.
Typically, the benefits resulting from revenue expenditure do not extend beyond an accounting year. Further, there are certain factors that help business entities and financial analysts to categorise business operations as revenue expenditure. A few of such factors include –
- Nature of business
- Purpose and maintenance
- Frequency of occurrence
- Amount of money spent
Notably, revenue expenditure is often applicable for tax deductions in an accounting period owing to their recurrent nature.
Revenue expenditure is also popularly known as OPEX or revenue expenses.
Types of Revenue Expenditure
In a broader sense, revenue expenses are grouped under two types –
1. Direct expenses
Expenses under this category usually arise through the course of production of goods and services. In most cases, direct expense include the following –
- Direct wages
- Freight charge
- Shipping charge
- Import duty
- Electricity cost
- Legal expenses
Here, it must be noted that in the case of manufacturing firms, direct expenses often factor in the cost involved to convert raw materials into finished goods.
2. Indirect expenses
Usually, these expenses are incurred while selling and distributing the produced goods and services.
Following are some of the most common examples of indirect expenses –
- Rent and taxes
- Miscellaneous expenses
Additionally, these expenses can also arise while managing the repetitive administrative operations of a business.
Revenue Expenditure Example
Typically, revenue expenditure incurred by a firm is reported on its Income Statement. However, such expenses are not stated on the company’s Balance Sheet.
For example, take a quick look at this excerpt of Income Statement below to understand the accounting treatment of revenue expenditure better.
An excerpt of the Income Statement of Birla Corporation Limited as on 30th March 2019:
|Cost of revenue||3,51,25,600|
|Selling general and administration||1,64,31,300|
|Total operating expenses||2,23,14,300|
Notably, high revenue expenditure indicates that a firm is efficient when it comes to managing their stock. Nevertheless, firms can improve their financial standing and manage their revenue expenses to a great extent by merely implementing cost-cutting strategies and optimising the use of current resources.
Significance of Revenue Expenditure
Revenue expenses are undoubtedly among the significant components of any business venture. Such expenses play more than one significant role. Take a look at these following pointers to become familiar with a few –
- Having a fair idea about the proficiency of each revenue expense helps to identify which costs are indispensable for running a business.
- Subsequently, it helps business entities to identify and tweak unessential expenses. Based on the information, they can easily make necessary adjustments as and when required.
- OPEX proves useful in determining a firm’s proficiency when it comes to stock and cost management.
- A record of such expenses enables business entities to make useful horizontal analysis and further helps to project a firm’s current financial standing more adeptly.
Nonetheless, management must review financial reports of the firms regularly to achieve a better financial picture of a company in the short-term. Doing so will also help to gauge its cost and revenue flow. Consequently, they will be better positioned to tweak unessential expenses and will be able to optimise their existing ones better.
Challenges of Revenue Expenditure
The limitations of revenue expenditure often come off as challenges for business owners. Some of the primary limitations are given below –
- Revenue expenses yield benefits in the short-term that are mostly limited to one accounting period.
- Such expenditure only helps to determine the current financial standing of the firm.
- These expenses are only concerned with generating revenue within a given period.
- It does not necessarily provide an accurate picture of a firm’s overall financial standing.
Difference between Revenue Expenditure and Capital Expenditure
|S.N.||Parameters||Revenue Expenditure||Capital Expenditure|
||Definition||The expenses a firm incurs each day to maintain its daily business activities are revenue expenditure.||Capital expenditure constitutes those expenses that are typically incurred while acquiring capital assets or upgrading the current ones.|
||Duration||Revenue expenditure is made during the short-term.||Capital expenses are incurred in the long-term.|
||Accounting treatment||It is reported in a firm’s Income Statement and is not stated in its Balance Sheet.||It is reported in the Cash Flow Statement of a firm. Also, it is stated under the header of fixed assets in the Balance Sheet.|
||Capacity||A firm incurs such expenses in the short-term to sustain its earnings.||Business entities incur these expenses to improve their firm’s revenue-generating capacity.|
||Advantage||The benefits derived are limited to the current accounting year.||The expenses generate benefit over the long-term.|
||Occurrence||Such expenses occur frequently.||The expenses incurred are non-recurrent.|
||Capitalisation||Revenue expenses are not necessarily capitalised.||Capital expenditures are capitalised.|
||Treatment of depreciation||Depreciation is not levied on a firm’s capital revenue.||Depreciation is charged on the firm’s total capital expenditure each year.|
In a nutshell, business entities incur revenue expenditure during their daily business operations. Notably, such expenses typically generate earnings in the same financial period during which they are incurred. Also, to maintain sustainable profits, companies need to focus their attention towards better cost management and optimal use of resources.