Revenue Cost


 Revenue cost is economic resources forfeited by the firm to finance acquisition of current assets for day to day running of the business. In other words, the intention of cost incurred is to acquire an asset for short-term accruing benefits such as purchase of inventory which will be re-sold to generate income. In other words, the intention of such cost is to acquire assets for re-selling. Example of such scenarios are;

So, when the organization purchases current assets for trading purposes such as inventory. In other words, the intention of such cost is to acquire assets for re-selling.

Notes On Revenue Cost

  1. Revenue cost is charged in the profit and loss account when determining the net profit of a business.
  2. Revenue cost is tax allowable expense. This implies that when the management is determining the net profit for taxation purposes, the gross profit is less of the revenue cost amount.
  3. If revenue cost is paid in advance, it is referred to as current asset such as prepaid expense and if it is in arrears, it is referred to as accrued expense and it is treated as current liabilities.
  4. Revenue cost is also referred to as revenue expenditure as explained in beginners level article.
  5. Revenue cost is always matched with revenue income as follows;

Advantages Of Revenue Cost

  1. Help in income or revenue generation

    The firm has first to spend revenue expense so as the firm to generate income in return. For example, purchase of inventory for re-selling purposes. You see, the business cannot sell nothing. There must be existence of inventory which in turn is re-sold to generate sales/profits.

  2. Revenue cost reduces government tax liability

    When revenue cost is charged in profit and loss account, it is a way of reducing the amount of income subjected to tax. So, the more the revenue cost charged, the less tax liability to be paid.

Disadvantages Of Revenue Cost

  1. Revenue cost reduce gross profit of the business

    Revenue cost are charged against gross profit of the business and the higher the figure is the less the gain.

  2. Revenue cost has an adverse effect on the liquidity of the firm.

    When the firm pays more and more of revenue cost, it may lead to difficulties of meeting day to day liabilities as and when they fall due.

About the Author - Dr Geoffrey Mbuva(PhD-Finance) is a lecturer of Finance and Accountancy at Kenyatta University, Kenya. He is an enthusiast of teaching and making accounting & research tutorials for his readers.