Revenue expenditure Flashcards
Inventory
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 to provide the service
– for example, 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. There are other costs related to inventory, such as insurance and storage costs.
Rent
This is the cost of using premises not owned by the business. These are regular payments, usually monthly, for the use of premises.
Rates
In the same way as private residents pay council tax to the local authority, 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.
Heating and lighting
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.
Water
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.
Insurance
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 – to protect the physical building from damage that may be caused by events such as fire ▸▸ contents insurance – 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 ▸▸ public liability insurance – to protect people within the building who may be harmed or injured from an event such as an accident ▸▸ employers’ liability insurance – this means that if the employee is injured at work, the business is protected against any claims for compensation or any legal costs incurred.
Administration
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 books. Telephone charges are also classed as an administrative cost and are slightly unusual from an accounting point of view. For a landline, these costs are split into two: there is the line rental cost, which is paid quarterly in advance and then the call charges, which are paid quarterly after use.
Salaries
A salary is an annual figure paid to an employee divided into equal monthly payments. For example, a trainee accountant may have a salary of £18,000 per year, meaning their gross pay is £1500 per month. 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. 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.
Wages
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.
Marketing
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.
Bank charges
Unlike personal banking, which is generally free, 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.
Interest Paid
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.
Depreciation
– an accounting technique used to spread the cost of an asset over its useful life.
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. For example, if a machine is purchased at a cost of £50,000 and is expected to last five years, this would not be shown as a one-off expense at the time of purchase but in the accounts shown as an expense of £10,000 per year. You will learn about two types of depreciation.
straight-line depreciation: an asset is depreciated by a set amount each year
reducing balance depreciation: an asset is depreciated by a set percentage of its remaining value each year.
Discount Allowed
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.
