A revenue expenditure is an amount spent on running a business day to day, or on keeping its existing assets in their current condition, whose benefit is consumed within the current accounting period. Because it does not create a lasting asset, it is recorded as an expense on the income statement in the period it is incurred. Common examples include wages and salaries, rent, utilities, office supplies, advertising, insurance for the period, fuel and ordinary repairs.
The term is used mainly in contrast with a capital expenditure, which buys or improves a long-lived asset and is recorded on the balance sheet, then spread over future periods through depreciation or amortization. Despite its name, a revenue expenditure has nothing to do with earning a specific item of revenue; the word refers to the fact that it is charged against the current period's revenue. The term is more common in British and Commonwealth usage, while US accountants more often simply say the cost is expensed.
Revenue expenditure compared with capital expenditure
| Feature | Revenue expenditure | Capital expenditure |
|---|---|---|
| Period of benefit | Current period only | Several future periods |
| Recording | Expensed immediately | Capitalized as an asset |
| Effect on profit | Reduces profit in full this period | Reduces profit gradually through depreciation |
| Typical examples | Wages, rent, routine maintenance, supplies | Buildings, machinery, major upgrades, software development meeting capitalization criteria |
| Cash flow statement | Usually an operating outflow | Investing outflow |
The distinction follows the matching principle: a cost should be recognized as an expense in the period in which it helps earn revenue. A cost whose benefit lasts for years is spread over those years, while a cost whose benefit is used up now is expensed now.
Worked example
A bakery spends the following during its financial year: $95,000 on wages, $24,000 on rent, $6,500 to service its ovens, $2,800 on cleaning supplies and $60,000 on a new oven expected to last ten years. The first four items, totaling $128,300, are revenue expenditures and reduce this year's profit in full. The oven is a capital expenditure. It is recorded as a fixed asset, and with no residual value and straight-line depreciation only $6,000 is charged to this year's income statement.
If the bakery wrongly treated the oven as a revenue expenditure, profit this year would be understated by $54,000, and profits in each of the next nine years would be overstated by $6,000. If it wrongly capitalized the oven servicing, the opposite would happen: assets and profit would be overstated this year.
Grey areas and judgment
- Repairs that merely restore an asset are revenue expenditure, but work that extends its life or increases capacity, such as an extraordinary repair, is capitalized.
- Small purchases of durable items, such as a $150 desk chair, are often expensed because of materiality. Many businesses set a capitalization threshold, for example $2,500 or $5,000, below which items are expensed.
- Advance payments for future services, such as a year's insurance, are recorded first as prepaid expenses and expensed as the period passes, so they become revenue expenditure over time.
- Large advertising campaigns or training programs may bring benefits for years, but accounting standards generally require them to be expensed because the benefit cannot be measured reliably.
Why the classification matters
The split between revenue and capital spending affects reported profit, asset values, tax deductions and ratios such as return on assets. It has also been the basis of major accounting frauds. In the WorldCom case uncovered in 2002, billions of dollars of ordinary line costs were recorded as capital expenditure, inflating profit. Auditors therefore test capitalization decisions closely, and companies document their policies in the notes on accounting policies.