Revenue Expenditure: Definition, Types and Examples

What is Revenue Expenditure?

The expense to run the day-to-day operational costs incurred by the business and the organisation to maintain their ongoing expenditure is known as ‘Revenue Expenditure’. These costs do not boost the profit nor do they contribute to building the asset, but they come in handy in maintaining operational activities and help to manage assets better.

Examples of revenue expenditure can be repair and maintenance of the asset, property rent, freight, selling costs, salary, etc.

Types of Revenue Expenditure

1. Direct Expenses

The costs that are directly related to making raw materials, finished products, or providing services are known as direct expenses. It includes the expenses incurred in the smooth running of the business. Some examples are wages to workers, shipping and freight charges, commission, rent, electricity, etc. For a manufacturing company, direct cost occurs while turning raw material into finished goods is directly expensive.

2. Indirect Expenses

Expenses that are incurred during the sales and distribution of the final goods and services are known as Indirect expenses. These expenses are not directly involved in production but in the smooth functioning of the business. Some examples of indirect expenditures are taxes, repair & maintenance, salaries, depreciation, etc.

Revenue Expenditure Example

Repair and Maintenance of the Assets

Repair and maintenance of assets such as plant & machinery help to a regular ongoing process of the business. It does not help in increasing the lifespan of the business.

Employee Salaries

Employees are an important part of the business, the salary paid to employees helps in the smooth running and functioning of the business and keeps them motivated.

Utility Bills

The business needs to pay its bills on time, like water, electricity, telephone, etc. These revenue expenditures are important for the smooth functioning of the business.

Property Rents

Property rent is an important part of the business and production, especially for a manufacturing company. It helps in the production of goods and storing them too.

Selling Cost

Expenses related to marketing, advertising, and sales promotion are part of selling costs. These are important for goods to reach its customer and market.

Importance of Revenue Expenditure

• Increased Proficiency

By optimising day-to-day expenses, businesses can reduce waste, allocate resources, and streamline operations. Efficiently managing revenue expenditure can increase a company’s overall efficiency.

• Identify Unnecessary Expenses

It also helps to identify unnecessary costs. This is very important for cost control and ensuring that resources are judiciously employed. By eliminating non-essential expenses, a company can free up funds for more critical expenses.

• Improved Financial Situation

Taking good care of how a company spends money on day-to-day affairs, makes its financial situation stronger. When a company can keep a close eye on and control the money it spends to run its business, it’s in a better position to pay its bills on time, avoid running out of money, and keep a positive view of its finances.

Limitations of Revenue Expenditure

• No Long-Term Horizon

Revenue expenditure focuses more on short-term expenses and does not contribute to making long-term investments. Relying solely on revenue expenditure limits the company’s ability to build for the future.

• Temporary Benefits

As it is not involved in asset creation, it only determines the company’s present situation and not future growth.

• Lack Profit Generating Capacity

It only ensures the smooth functioning of the assets and not its upgradation. It only helps to ensure the daily functioning of the business and provides no future returns. Also, it does not help in profit or wealth creation.

Difference Between Revenue Expenditure and Capital Expenditure

Frequently Asked Questions (FAQs)