Revenue Expenditures

Revenue expenditures are short-term expenses used in the current period or

typically within one year. Revenue expenditures include the
expenses required to meet the ongoing operational costs of running a
business, and thus are essentially the same as operating expenses (OPEX).

Revenue expenditures also include the ordinary repair and maintenance

costs that are necessary to keep an asset in working order without
substantially improving or extending the useful life of the asset. Revenue
expenses related to existing assets include repairs and regular maintenance
as well as repainting and renewal expenses. Revenue expenditures can be
considered to be recurring expenses in contrast to the one-off nature of most
capital expenditures

Capital Expenditures
Capital expenditures represent significant investments of capital that a
company makes to maintain or, more often, to expand its business and
generate additional profits. Capital expenditures consist of the purchase
of long-term assets, which are assets that last for more than one year but
typically have a useful life of many years.

Capital expenditures are often used for buying fixed assets, which are
physical assets such as equipment. As a result, capital expenditures are
typically for larger amounts than revenue expenditures. However, there are
exceptions when large asset purchases are consumed in the short term or
the current accounting period.
Difference between Capital and Revenue Expenditure
Examples of Capital Expenditures
The following are the most important items of capital expenditure:

• Purchase of factories and buildings

• Purchase of machines, furniture, motor vehicles, or office

equipment

• Cost of goodwill, trademarks, patents, copyrights, and designs

• Expenditure on installation of plant and machinery and other

office equipment

• Additions or extension of existing fixed assets

• Structural improvement or alterations to fixed assets that increase

their lifetime or earning capacity

• Preliminary expenses of a limited company

• Cost of issue of shares and debentures

• Legal expenses on loans and mortgages

• Interest on capital during construction periods

• Development expenses (e.g., for mines and plantations)

Examples of Revenue Expenditures
Examples of important items of revenue expenditure are shown as follows:

• All expenses incurred in the ordinary conduct of business (e.g.,

rent, salaries, wages, free samples, advertising costs, and so on)

• Expenses incurred by way of repairs, renewals, and replacement

for the purpose of maintaining existing fixed assets

• Cost of merchandise bought for resale

• Cost of raw materials and stores purchased for manufacturing

• Wages paid to manufacture products for sale

• Depreciation of assets used in business

• Interest on business loans

• Freight and cartage paid on merchandise purchased

• Cost of oil to lubricate machinery

• Vehicle servicing

• Any expenditures incurred in defending lawsuits relating to the

sale or purchase of merchandise
What is a Nominal Account?
A nominal account, also known as a temporary account, acts as a repository of
transaction data for an accounting period of usually one fiscal year. Nominal accounts are
also called temporary accounts because they are zeroed out at the end of the fiscal year.
This allows them to begin the next period with a clean slate.

Nominal accounts are mostly income statement accounts. All revenue and expense
accounts are temporary. In addition, the income summary account, if the company
chooses to create one during the closing process, is also a temporary account, as is the
dividends account.

Funds can be transferred from a nominal account to a real account by zeroing out the
balance with a journal entry. If the account is an expense account with a normal debit
balance, then an entry that credits the expense account for the amount of the balance and
debits the permanent account where the balance should be moved to is one way to
transfer funds out. If the account is a revenue account with a normal credit balance, then it
would be zeroed out with a debit and the permanent account where the funds are being
transferred to would get a credit for the same amount.

What is a Real Account?

A real account is an account that retains and rolls forward its ending balance at the end of
the year. These amounts then become the beginning balances in the next period. The
areas in the balance sheet in which real accounts are found are assets, liabilities, and
equity. Real accounts also include contra asset, contra liability, and contra equity accounts,
since these accounts retain their balances beyond the current fiscal year.

Real accounts are not listed in the income statement. All of the balances in the revenue,
expense, gain, and loss accounts (known as nominal accounts or temporary accounts)
listed in the income statement are flushed out to retained earnings at the end of each fiscal
year, resulting in zero beginning balances in these accounts as of the beginning of the next
fiscal year. Since retained earnings is a real account, this means that the balances in all
nominal accounts are eventually shifted into a real account.

Auditors routinely review the contents of real accounts as part of their audit procedures.
Differences Between Nominal and Real Accounts

❖ Time of Closing Account

Nominal accounts are closed at the end of the year.

Real accounts are not closed at the end of an accounting period. They are left open
and the balances carried forward to the next year’s accounting statement.

❖ Account Type

The Nominal Account contains accounts like the incomes, gains, expenses and
losses.

The real account consists of the assets, owner’s equity and liabilities account types.

❖ Financial Statement Used

The nominal accounts are noted in the business’s income statement.

The real account transactions are noted in a balance sheet.

❖ Purpose

The main purpose of a nominal account is to determine the net profits and losses of
a business.
Example of Real Accounts
The transaction below shows the interaction of two different accounts: one is
‘Furniture’ and the other is ‘Cash’.

Furniture – Real Account (tangible) & Cash in Hand – Real Account (tangible)

• Purchased furniture for 10,000 in cash

Accounts Involved Debit/Credit Rule Applied

Furniture A/C 10,000 Real A/C – Dr. what comes in

To Cash A/C 10,00 Real A/C – Cr. what goes out

Important to know about Real Accounts – In spite of the fact that “debtors” are
assets for the company, they continue to be classified as personal accounts. This is
because ‘debtors’ belong to individuals or entities and personal accounts
specifically serve the purpose of calculating balances due to or due from such 3rd
parties.

Example of Nominal Accounts

The transaction below shows the interaction between two accounts: one is a
‘Purchase’ and the other is ‘Cash’.

Purchase – Nominal Account (expense) & Cash – Real Account (tangible)

• Purchased good for 15,000 in cash

Accounts Involved Debit/Credit Rule Applied

Purchase A/C 15,000 Nominal A/C – Dr. all expenses

To Cash A/C 15,000 Real A/C – Cr. what goes out

Sources :

• study.com
• accountingtools.com
• differencebetween.net
• financestrategists.com
• investopedia.com
• byjus.com