Accounting for Revenue Expenditure

Revenue expenditure is expenditure which is expensed out in the period in which it is incurred. It is not recorded as an asset on balance sheet because it is expected to benefit the company only in the period in which it is incurred.

Expenditures are classified into revenue expenditure and capital expenditure in accordance with the matching concept of accounting, which stipulates that revenues and expenses should be matched, i.e. in a particular period all costs incurred to generate revenue should be charged in income statement.

Revenue expenditure is all such expenditure which is necessary to generate revenues for one particular accounting period and its benefits are not expected to spill over to future periods. Capital expenditure on the other hand is expenditure expected to benefit a company for more than one accounting periods. Unlike revenue expenditure, which is expensed out straight away in the period in which they are incurred, capital expenditure is capitalized on balance sheet and charged as an expense over multiple periods through the process of depreciation and amortization.

Journal entries

All amount of revenue expenditure is expensed out in the period in which it is incurred:

Capital expenditure is first capitalized and then expensed out in future based on some appropriate depreciation or amortization methods such as straight line depreciation method or declining balance method.

Examples

Typical examples of revenue expenditure include:

• Repairs and maintenance
• Salaries (unless they are incurred in construction of an asset such as a plant)
• Staff training expenses
• Marketing expenses
• Delivery and distribution expenses
• Bonuses
• Audit fee

Problem

Classify the following expenditures of an airline into capital expenditure and revenue expenditure:

• Replacement cost of an engine
• Fuel consumed in flights
• Repainting cost of airplane (which is done once every year)
• Salaries of pilots and other crew and aircraft maintenance staff
• Charges to be paid for use of airports
• Amount paid to obtain a license to operate in EU for next years
• Purchase of new flight management software
• Contract entered for maintenance and bug-fixing of that above mentioned software

Solution

• Replacement of engine is a capital expenditure because the new engine is expected to run for more than one accounting periods and hence must be capitalized and depreciated. The old engine is de-recognized.
• Fuel consumed in flights is a revenue expenditure because it is incurred to generate revenues for one particular period.
• Repainting cost is a revenue expenditure because it is expected to be performed in each period.
• Salaries of pilots and crew is revenue expenditure just like fuel consumed because it is incurred for each new flight.
• Charges paid to airports for right to use is also a revenue expenditure because it is a recurring payment made for each new flight.
• Amount paid to obtain license is a capital expenditure because gives the company the right to operate and earn revenue in EU market for next 5 years.
• Purchase of new software is a capital expenditure
• Maintenance of new software is a revenue expenditure

by Obaidullah Jan, ACA, CFA and last modified on Apr 1, 2019