What is Revenue Expenditure?
Revenue expenditure is expenditure concerned with the costs of doing business on a day to day basis. When companies make a revenue expenditure, the expense provides immediate benefits, rather than long term ones. This is contrasted with capital expenditures, which are long term investments intended to help a business grow and thrive.
It is sometimes said that businesses have to spend money to make money. Businesses use their revenues both to amass capital which can be used in the long term, and to cover immediate expenses. Revenue expenditures include things like maintenance, wages and salaries, and costs for utilities. The revenue expenditure consists of expenses which must be covered immediately to keep the business running and which provide immediate benefits.
Companies break their expenses into revenue expenditures and capital expenditures so that they can see how they are using their funds and they can assess whether or not they are operating efficiently and effectively. Routinely high revenue expenditure can make it difficult for a business to build up capital, which means that it cannot make long term investments and it may not be prepared in the event of a crisis situation. For example, if a restaurant is spending most of its earnings compensating employees, paying suppliers, and performing maintenance, it may be in trouble if the freezer system goes down and needs to be replaced.
At times, a calculated capital expenditure can cut down on revenue expenditure. To borrow the restaurant example again, the owners might sit down and realize that buying a building in which to operate would be cheaper than renewing a lease. Thus, they might make the decision to expend capital for that purchase in the interests of cutting down operating costs and establishing a long term presence. The new building will also be an investment itself; the restaurant now has an asset it can sell or rent if it needs to.
Certain revenue expenditures may be deductible for tax purposes. It is recognized that a portion of business revenue applied to immediate expenses should not be taxed and business can claim such expenses as deductions. For example, a business is not required to pay taxes on the money it uses to pay payroll taxes. The rules for deductions are very complex and for a large business it may be necessary to consult an account to get accurate information and advice so that taxes will be filed properly.
Certainly take the advice of this article and consult an accountant if you have questions about this. Last year I had a huge advertisement expenditure that I did not know was tax deductible. It saved me a ton of money in taxes and allowed me to expand my business. I would have never found it on my own, the accountant was a real help.
@katzdad-Since revenues are technically money that is coming in and expenditures is money that is going out the term for when revenues exceed expenditure would be a surplus. It is kind of like when you have money left over each month after paying all your bills. Most companies choose to reinvest the surplus into the future of the company based on their expenditure budgets.
So in reading this I have to wonder, what happens when revenues exceed expenditures? Is there a specific term for that situation?
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