Revenue Expenditure

Question 1

Revenue Expenditure

Answer 1

• Spending on items on a day-to-day or regular basis
• These are the expenses incurred by a business that are shown on the profit and loss account (also
  known as a statement of comprehensive income)

Question 2

Inventory

Answer 2

• Most businesses providing a good or service will require some sort of inventory, whether it is raw materials, finished goods to sell on or supplies
• E.g. or shampoo and conditioner for a hairdresser
• When a business is first set up, it is likely to have to buy inventory with cash as it will not have built a reputation
  as being trustworthy and able to pay. As a business becomes more established, it may be able to buy inventory on credit (such as receiving the inventory and paying 30 days later)
• Bigger and more established businesses may also be able to drive the cost of inventory down as they will buy in larger quantities

Question 3

Rent

Answer 3

• This is the cost of using premises not owned by the business
• These are regular payments, usually monthly, for the use of premises

Question 4

Rates

Answer 4

• Businesses pay non-domestic rates
• This is a sum of money paid to the local council to go towards services such as street lights and refuse collection
• This is not a set amount, but is calculated by the council based on the size and location of the premises and the
  nature of the business

Question 5

Heating + Lighting [Energy]

Answer 5

• This covers payments for services such as gas and electricity
• The business will receive regular bills, often quarterly (every three months) for the provision and use of these services

Question 6

Water

Answer 6

• This involves payment for the supply of water to premises and use of water
• This can be a fixed rate or based upon usage if a water meter is fitted

Question 7

Insurance

Answer 7

• A business is legally required to take out a number of types of insurance to protect itself from the possibility of serious losses

- These include:
▸ buildings insurance 
▸ contents insurance 
▸ public liability insurance 
▸ employers’ liability insurance

Question 8

Buildings Insurance

Answer 8

To protect the physical building from damage that may be caused by events such as fire

Question 9

Contents Insurance

Answer 9

To protect what is inside the building in terms of machinery, fixtures and fittings and stock from damage that may be caused by events such as flooding

Question 10

Public Liability Insurance

Answer 10

To protect people within the building who may be

harmed or injured from an event such as an accident

Question 11

Employers’ Liability Insurance

Answer 11

This means that if the employee is injured at work, the business is protected against any claims for compensation or any legal costs incurred

Question 12

Administration

Answer 12

• Administration refers to the paperwork that goes on within a business either internally between employees or externally with suppliers and customers
• Administrative costs include items such as postage, printing and stationery, which might include items such as business cards, headed paper and order book

Question 13

Salaries

Answer 13

• A salary is an annual figure paid to an employee divided into equal monthly payments
• E.g. an employee with a salary of £18, 000 per year. The employee will then have to pay National Insurance, tax and maybe pension contributions on this figure, so the amount they actually take home will be quite a bit less
• For the business, however, the actual amount they have to pay (the real cost to the business) is higher
• E.g. On a salary of £18,000 the business also has to pay employers’ National Insurance of 12.8 per cent, (an additional £2304) plus any pension and other benefits

Question 14

Wages

Answer 14

• A wage is an hourly rate paid to an employee, meaning there is a direct link between the number of hours worked and the amount of money paid
• Paying a wage rather than a salary allows greater flexibility for both the employer and the employee, but
  also creates greater uncertainty

Question 15

Marketing

Answer 15

• This covers a whole range of costs associated with attracting the customer and convincing them to make a purchase
• Possible marketing costs might include advertisements, promotional literature, promotional events, point of sale materials and so on

Question 16

Bank Charges

Answer 16

• Banks charge businesses for each transaction that takes place, for example, every time a cheque is paid in or written, whenever cash is deposited, and so on
• Banks might offer free banking to businesses for the first year as a marketing technique, but, once the first year is over, bank charges can soon start to add up to quite a large amount of money

Question 17

Interest Paid

Answer 17

• If the business has a bank loan or a mortgage, then interest will be charged on this
• Banks may offer big businesses preferential rates if they are confident that the money will be paid back and if they want to keep that particular business as a loyal customer
• Big businesses will carry out a lot of transactions and pay high bank charges, so, for the bank, it may be worth offering lower interest rates to keep them happy

Question 18

Depreciation

Answer 18

• Assets lose value over time
• Accountants use depreciation to spread out the cost of an asset over its useful life
• Depreciation is a paper exercise to match the cost of an asset against the time it is used within a business

Question 19

Discount Allowed

Answer 19

• Reductions offered to customers are an expense to a business as it reduces the amount of cash flowing into the business
• Discounts may be allowed to attract customers, for bulk purchases or to gain a competitive advantage