How to identify Revenue Expenditure

In this article, we are going to discuss the topic “How to identify revenue expenditure”.

Mrs. Sujana, working as a Teacher in a private school. She has a Housing loan EMI of Rs.8,711. The amount of EMI is to be paid on the 7th of every month. But she has not enough money.

A 33-Year Old Software employee Mr.Srikanth earns Rs.50,000/- as a Salary. But he always ends the month with almost no reserves. He doesn’t have money at least for Petrol or for Provisions etc. by the end of the month due to excessive outside dinners & unnecessary shopping.

Normally it’s the case for most of salaried employees.

People should know where they are losing their money. For that one should understand the types of expenditures.

Either You may be an Employee or a Teacher or a Businessman, identifying such expenditure and for what purpose you are expending.

And also one needs to identify whether such expenditure is really useful or not. That’s the most important, material, and crucial.

Before that one should understand what the different types of expenses are. And one of them is “Revenue expenditure”.

Let’s get started..!!

Page Contents:

1. Revenue Expenditure Meaning
2. Conditions to identify Revenue expenditure
3. Accounting Treatment
4. Disclosure in Financial statements
5. Examples

What is Revenue Expenditure?

In day-to-day life, there will be a wide range of daily expenses say House rent, Petrol expenses, groceries, Restaurant bills, shopping, Beauty Care, Gas bills, DTH recharges, Internet bills, Mobile recharges, and a lot more.

Out of all these expenses, one should individually understand and identify which expenses are most important and which are immaterial. It is on a case-to-case basis. Firstly let me classify your expenses as

1. Priority/ Preferential expenses – House rent, Petrol expenses, Grocery, Electricity Bills, etc
2. Important but not Priority – Gas bills, DTH recharges, Internet bills, Mobile recharges
3. Unimportant and Useless expenses – Restaurant bills, Purchase of Clothes, Unnecessary Gadgets like buying mobiles when a new model comes etc.,

All these expenses will be called “Revenue Expenditure” only. To understand the same as per the Accounting,

Revenue expenditure is an expenditure that is
– Incurred for a period of less than 1 accounting period.
– I.e. Short term in nature.
– Incurred not only for the production of the goods and services
– but also for the expenses related to capital items.

Are there any conditions to identify the revenue expenditure!!
Yes. It has 3 conditions. Check those conditions to identify whether an expenditure is a Revenue expenditure or not.

From the above, It has been understood that all the expenses like House Rent, Petrol expenses, groceries, Electricity Bills etc are incurred for a period of less than one accounting period and are particulary short-term in nature.

Conditions to identify Revenue expenditure?

To classify any expenditure as Revenue expenditure, any of the following conditions are to be satisfied. Any Expenditure,

1. Which is incurred for the Day-to-Day Conduct of the business (or) any expenditure which is recurring in nature.

Eg:

• Office Rent,
• Electricity & Power,
• Printing & Stationary etc.[Or] 

2. Which is incurred for maintaining a fixed asset in working condition
   (or) Which does not increase the life of the asset.

Eg:

• Petrol charges for Car
• Lubricant Oils for Machinery
• Annual Maintenance charges (AMC) for Equipment etc.

3. Which is not classified as a Capital expenditure can be treated as a Revenue Expenditure (Will be discussed in the next topic on Capital Expenditure)

Note:

Revenue expenditure should not be decided by its amount of expenditure incurred. How ever, it should satisfy the above conditions.

In the case of a businessman, one should record such expenditure in the books of accounts i.e. accounting treatment. 

How do record Revenue expenditure in the books (Accounting Treatment)?

Revenue expenditure does not increase the life of the asset. Hence, it should not be added to the cost of the asset. It means due to this expenditure, no future benefit will be increased. It shall be charged to the Profit and Loss account by debiting expenditure.

Expenditure A/c          Dr                    [Nominal A/c]
To Cash / Bank A/c                             [Real A/c]

Now, one should understand the proper impact of the above entry in the financial statement.

Disclosure in Financial statements:

In Profit &Loss a/c:

• Particular expenditure shall be debited to Profit and Loss account
  Hence, Profit will impact i.e. reduced

In Balance Sheet:

• No direct impact on Balance sheet.

Revenue Expenditure Examples:

Let’s discuss the below Revenue Expenditure examples to clarify, “How to Identify Revenue Expenditure”.

1. Electricity charges of Rs.30,000 paid towards to M/s APEPDCL

It is a Revenue Expenditure. As the Electricity charges incurred for day to day conduct of the business. It is a monthly expenditure.

2. Microsoft paid $42.9 million to Mr. SatyaNadella, CEO as a Remuneration

Mr.Satya Nadella is a Key Managerial person. He is working for Microsoft. And Microsoft is paying  huge amount as salary to Mr.Satya Nadella. It‘s a Revenue expenditure. It incurred for Day-to-Day Conduct of the business or recurring in nature.

3. Annual Repairs and Maintenance charges of Rs.25,00,000/- paid to M/s Agarwal Coal transportation Company having 10 lorries.
   It is a Revenue Expenditure. Repair charges incurred for maintaining the Lorries in a working condition, where as it doesn’t increase the life of the lorries.

From the above, it is clear that expenditure incurred for Housing loan EMI is not revenue expenditure. Since it comes under capital expenditure (which will be discussed in the next article). Paying Rent to the Canteen owner is a revenue expenditure.
Weekend parties or buying of Clothes is also a revenue expenditure. But it creates impression of brand. It should be minimized as it drains the personal reserves instead of that use it for long term benefit of Investing on a Land, on Gold or Start making a SIP etc.,

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