Revenue Expenditure Definition & Examples

It takes money to make money. Investing the money you make back into your business is essential if you expect to grow and excel. But the investment you make in your business operations needs to be properly accounted for if you are to gain a clear understanding of your business finances and manage your cash flow. 

Accounting for your operational expenses and understanding the revenue they will generate (and when they will generate it) can prevent cash flow issues that could stymie your operations. In this post, we’ll look at the principle of revenue expenditure and how it applies to your business accounting. We’ll provide some illustrative examples as well as differentiating revenue expenditure from other forms of capital investment. 

What is revenue expenditure?

The definition of revenue expenditures is an expense that is incurred by your business as a result of producing its products and services. In other words, it refers to operational expenditure. However, it is a specific type of operational spend.

Revenue expenditure refers specifically to expenses that are significant for generating revenue within the same accounting period in which they’re spent.

In order to properly account for revenue expenditures, they need to be charged to expense as soon as the cost is incurred. This ensures the matching principle is used to link the expense your business has incurred to the revenues it generates. This makes for clearer and more accurate income statement reporting. 

Different types of revenue expenditure

Revenue expenditures typically fall into two categories:

• Expenses for maintaining revenue-generating assets – Such as repair and maintenance of equipment or any other costs to support current operations.

• Expenses for generating revenue – These are day-to-day expenses that are linked to revenue-generating activities such as utilities, rent, office supplies and the salaries of your sales team. 

Examples of revenue expenditure

In order to properly account for them, you need to know what is and is not classed as revenue expenditure. While these can vary enormously by industry, let’s look at some common examples of revenue expenditure to illustrate the principle. 

Remember that revenue expenditures are expected to generate revenue (either directly or indirectly) within the same accounting period, which is usually a year.

Some examples of these expenditures may include:

• Selling expenses such as shipping fees, import duties etc.

• Marketing expenses to promote the launch of a new product

• Software upgrades

• Costs of maintaining or repairing plant and machinery

• The cost of utilities and telecoms

• The rental costs of your business premises or factory

• Interest charged on financing new equipment

• Salaries and commissions paid to your team 

What’s the difference between revenue expenditure and capital expenditure?

All of the examples above are considered revenue expenditures because they contribute to the generation of revenue within a set accounting period. But what about the investments that are expected to pay off outside of this window? These are referred to as capital expenditures. 

Although the two terms are sometimes used interchangeably, capital expenditures are not accounted for in the same way. Because capital expenditures may generate revenue within a different accounting period, they cannot be charged to expense at the same time as revenue expenditures. 

Why is it important to track revenue expenditure?

A greater understanding of revenue expenditure allows businesses to identify which expenses can be relied upon for generating immediate revenue, and which will take longer to pay for themselves. Thus, it can help businesses to identify unnecessary expenses or at least those which may put an unnecessary strain on their liquidity.  

We can help

If you’re interested in finding out more about revenue expenditure or any other aspect of your business finances, then get in touch with our financial experts at GoCardless. Find out how GoCardless can help you with ad hoc payments or recurring payments.