Revenue expenses are costs for day-to-day business operations, while capital expenses are long-term investments. High revenue spend can make it hard to accumulate capital, but calculated capital expenses can reduce revenue expenses. Some income expenses may be tax-deductible.
Revenue expenses are expenses related to the costs of doing business on a day-to-day basis. When companies spend revenue, the expense provides immediate benefits, rather than long-term benefits. This is contrasted with capital expenditures, which are long-term investments intended to help a business grow and prosper.
It is sometimes said that companies have to spend money to make money. Businesses use their income both to accumulate capital that can be used in the long term and to cover immediate expenses. Income expenses include things like maintenance, wages and salaries, and utility costs. Income expenses consist of expenses that must be covered immediately to keep the business running and that provide immediate benefits.
Companies divide their expenses into revenue expenditures and capital expenditures so that they can see how they are using their funds and can assess whether they are operating efficiently and effectively. Routinely high revenue spend can make it difficult for a company to accumulate capital, meaning it can’t make long-term investments and may not be prepared in the event of a crisis situation. For example, if a restaurant spends most of its profit compensating employees, paying vendors, and performing maintenance, it may run into trouble if the freezing system fails and needs to be replaced.
Sometimes a calculated capital expense can reduce revenue expense. To borrow the restaurant example again, owners could sit down and realize that buying a building to operate in would be cheaper than renewing a lease. Therefore, they might make the decision to spend capital for that purchase in the interest of lowering operating costs and establishing a long-term presence. The new building will also be an investment in itself; The restaurant now has an asset that it can sell or rent if necessary.
Certain income expenses may be deductible for tax purposes. It is recognized that a portion of business income applied to immediate expenses should not be taxed and businesses may claim such expenses as deductions. For example, a company is not required to pay taxes on the money it uses to pay employment taxes. The rules for deductions are very complex and for a large company it may be necessary to consult an account for accurate information and advice so that taxes are filed correctly.
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