What is revenue expenditure?
Revenue expenditure is spending on the day-to-day running of a business, such as wages, rent and repairs, which is charged in full to the profit and loss account.
What revenue expenditure means
Revenue expenditure covers costs whose benefit is used up within the year, or which keep existing assets in working order rather than improving them. Wages, rent, utilities, stock, marketing, insurance and repairs are typical examples. They go straight into the profit and loss account for the period in which they are incurred.
Capital expenditure is different. It buys or improves an asset that will benefit the business for more than a year, such as equipment, vehicles or a building extension. It goes on the balance sheet as a fixed asset and is depreciated over its life.
Example
A bakery has four costs in the same month:
| Cost | Amount | Treatment |
|---|---|---|
| Replacing a broken oven door seal | £180 | Revenue: a repair |
| Repainting the shop | £1,200 | Revenue: maintenance |
| A new oven | £9,000 | Capital: a new asset |
| Building a rear extension | £40,000 | Capital: improves the premises |
The £1,380 of revenue costs reduce this year's profit in full. The oven is capitalised and depreciated in the accounts; for tax it will normally qualify for the Annual Investment Allowance. The extension is capital too, but buildings do not qualify for the AIA.
Revenue vs capital at a glance
| Revenue expenditure | Capital expenditure | |
|---|---|---|
| Benefit lasts | Less than a year | More than a year |
| Purpose | Running and maintaining the business | Acquiring or improving assets |
| In the accounts | Charged to profit and loss | Added to the balance sheet and depreciated |
| Tax relief | Deducted as an expense | Through capital allowances |
A useful rule of thumb: if the spending would still be there next year as something the business owns or has improved, it is probably capital. If it has been used up or simply kept things running, it is revenue.
Why it matters for your business
Classifying a cost wrongly distorts profit and can mean claiming tax relief in the wrong year or in the wrong way. HMRC looks closely at large "repairs" that are really improvements. The general test is whether the work restores an asset to its original condition, which is a repair, or makes it better than it was, which is an improvement. Cloudkeepers reviews larger costs at year end to make sure they are treated correctly.
Common questions
Subscriptions such as accounting or design software are revenue expenditure, charged as they are paid. Buying a perpetual licence or paying for bespoke software that will be used for several years is often treated as capital and spread over its useful life.
Not always. A repair that restores an asset to its original condition is revenue. Work that improves it, extends it or replaces it entirely is capital. Replacing single-glazed windows with modern double glazing is usually still a repair, because it is the modern equivalent.
More accounts & bookkeeping terms
- Accounting equation
- Accounts payable
- Accounts receivable
- Accrual accounting
- Accruals
- Amortisation
- Assets
- Bad debt