A company will have different types of expenditure, how will revenue expenditure be treated in
the accounts?
I’m Thomas Harwood and Welcome to The Accounting Student, where we create free and short videos
so that you can learn about accounting.
Today’s video is looking at what is revenue expenditure.
Usually a business will have cash coming in, which is can be known as income and cash going
out which can be referred to as expenditure.
Expenditure can be defined as a payment or agreement to make a payment which in return
a benefit, asset or service will be received.
Business expenditure can range from anything from the purchase of office furniture to paying
the petrol bill to refill a van.
As there is such a mixture of expenditure, it maybe beneficial for a business to categorise
them into particular groups as these will possibly be treated differently in the accounts.
In the accounting world, there is the idea which is adopted in practice of categorising
expenditure into two main categories.
And they are known as capital expenditure and revenue expenditure.
In this video, we will look at revenue expenditure.
Revenue expenditure is recognisable when the expense is incurred in running the business
on a day to day basis.
Unlike Capital expenditure, revenue expenditure is not recognisable when a business spends
money on enhancing the worth or value of fixed assets.
The main difference between revenue expenditure and capital expenditure can be demonstrated
with the total cost of operating a motor vehicle.
Initially acquiring the motor vehicle for the business is an example of capital expenditure.
This is because the vehicle will be in the business for use for at least a few years
and therefore is a fixed asset.
On the other hand, paying for petrol to use in the motor vehicle will be a revenue expenditure.
This is mainly because the petrol or expenditure will be used up in a short time and does not
add long term value to the fixed asset.
Additionally, it is fundamental that there is a correct distinction between capital and
revenue expenditure as this is essential to determine a correct value for the profit and
assets of a business.
Let’s have a look at an example to demonstrate how we identify revenue expenditure.
Davina has her own advertising and media company.
Davina has a specialised printer that contributes heavily to the adverts service the company
provides.
She recently bought a bundle of ink toners to cope with demand.
Davina is confident that the printer is capital expenditure because it is a fixed asset. However,
she is unsure whether the ink toners for the printer can be recognised as capital or revenue
expenditure.
So there are two main questions we need to ask.
The first one is, is the expenditure is directly incurred in bringing the fixed asset into
use for the first time?
In this example, the ink toners are not directly incurred in bringing the fixed asset or printer
into use for the first time because it was already in the business and in use.
This indicates that the ink toners maybe revenue expenditure.
The second question is did the expenditure improve a fixed asset beyond it’s capability
when first owned?
The ink toners were bought to assist the printer do its main job of printing or copying the
adverts of work required. This is not improving the printers ability, it is just helping print
and copy work at the same standard.
To conclude the answers from the two questions suggest that the expenditure will be classed
as revenue expenditure because the expense is incurred in running the business on a day
to day basis and not in enhancing the worth or value of fixed assets.
So that was the explanation of what is revenue expenditure. If you enjoyed it, press the
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