Tag: Payable and Expenses

Are expenses and expenditures different? If yes, what are the differences? These must be some thoughts running through your head when you read the title. However, the fact is that the terms ‘expense’ and ‘expenditure’ have some subtle differences and it is crucial to understand what these are. Let’s dive deeper without much delay.

What is Expense?

Expenses are the costs a business incurs to procure goods or services. Any company expense is noted or recorded in the income statement as a negative figure in the column denoting revenue. Expenses need not always be related directly to the products or services that a business sells. Now that we have understood what is expense, let’s move forward and discuss the types of expenses that a business incurs.

How many types of expenses does a business incur?

Typically, expenses are divided into two categories—direct and indirect expenses. Direct expenses are costs incurred directly toward the products or services the business offers. Indirect expenses are also called overhead and include expenses like rent, marketing, and other such expenses. Furthermore, the payments toward expenses can either be fixed or variable. For instance, rent is a fixed expense that needs to be paid consistently at fixed levels regularly. Payments like consumables and commissions to salespeople can vary according to many factors.

What is expenditure?

Expenditure relates to the outflow of funds that are related to the business. Expenditure relates to the payment you make toward expenses and therefore has more to do with the cash flow of the business.

What are the different types of expenditure?

Generally speaking, most businesses categorize expenditure as capital expenditure, operating expenditure, and discretionary. As the name suggests capital expenditure relates to the money you pay towards capital equipment.  In the same way, payments made for business operations such as rent, salaries, utilities, and more are considered operating expenditures. Discretionary expenditures are payments that are more of a choice than an absolute necessity. These include advertisement, employee recreation, etc.

Also Read: What Are Non-operating Expenses and What Is Their Impact?

What is the difference between expense vs expenditure?

Expenses can be defined as the costs you incur for your business during a particular period while expenditure refers to the payments that your business makes during a time period. Often businesses incur an expense that they are committed to paying but delay the payment, even though it reflects in their book of accounts as an expense. Once the payment is made it becomes an expenditure.

Aspect	Expense	Expenditure
Definition	It is the amount spent by a company in a given time on conducting its operations.	The payment made to cover expenses or the flow of money from the business
Accounting Category	It appears in the profit and loss account as an expense and reduces the profits	Recorded in the cash flow statement as a payment, affecting liquidity.
Nature	Represents the cost of products/services acquired during the period.	Shows the real outflow of cash or funds from the business.
Timing	Can be incurred but not paid immediately (accrued expenses).	Reflects payments made, usually in real-time
Examples	Rent, salaries, utilities, cost of goods sold.	Payments for rent, salaries, capital expenditures

Understanding the difference between expense and expenditure is crucial for both accounting and business operations

What are the Examples of Expenditures?

Expenditure denotes the outflow of cash made by a company for several activities such as expenses, capital purchases, and other payout. These can be subdivided into several groups, which differ in their nature and influence on the business’s finances. The following are the common types of expenditure businesses experience:

Capital Expenditure (CapEx)

Definition: Capital expenditure is the estimated monetary value spent on the acquisition, enhancement, or repair of physical assets that are used in production for a long duration such as machinery, equipment, structures, and land.

Examples:

• Purchasing New Machinery: Manufacturing or production processes often require the use of new machines to enhance the performance of such operations.
• Buying Space or Real Estate: In order to grow the business, the firm will need to acquire more parcels of land or buildings.
• Upgrading Technological Infrastructure: All technology improvements such as the purchase of computers, new software systems, or new servers are considered capital expenditures.

Impact: Capital expenditures are generally big, one-off spending aimed at expanding the company’s growth and asset base. These assets will be straightened on depreciation and therefore do not reflect in profits immediately as they will stay on the balance sheet.

Operating Expenditure (OpEx)

Definition: Business operations require regular, inflexible expenses referred to as operating expenditures. They are necessary expenses for the proper working of the organization.

Examples: 

• Rent: Rental expenditure for/offices or other facilities is a key operating cost. 
• Salaries and Wages: Employee remuneration is a periodic operational cost that keeps the business active. 
• Utility Bills: Payments made for the provision of electrical, water, gas supplies, and any other facilitation of service provision. 
• Office Supplies and Consumables: Article categories such as paper, pens, and other things that aid in carrying out daily business.

Impact: Operating expenses are usually repetitive and these expenditures have direct consequences on the income statement of the business to the extent that their profitability is decreased in the period the expenses occur. Proper management of these expenses is important for the profitability of any organization.

Discretionary Expenditure

Definition: Every discretionary expenditure is a decision relative to the cost of the business which the management of the business can choose to incur or not. i.e. The money spent on such things is not very important for the functioning of the business but is helpful in achieving certain objectives or for the benefit of the employees mainly.

Examples: 

• Advertising and Marketing Campaigns: Any money spent on advertisements or promotions or on building a brand. 
• Employee Benefits and Recreational Activities: Expenses incurred in programs promoting staff wellbeing, team-building activities, or recreational centres. 
• Sponsorships and Event Participation: Expenses that include paying for meetings, sponsorships, events, and other appropriate strategies that the business pursues. 

Impact: Such expenditures are less rigid and may be negatively bent based on the firm’s current financial condition or strategic focus. Such expenses are often cut back as a result of the period of recession of the economic condition.

Is Every Expenditure an Expense?

Not every expenditure qualifies as an expense. Although both expenditures and expenses refer to the outflow of money from a business, they are not interchangeable terms. There are distinct differences between the two, primarily related to how they are accounted for in the financial statements. Let’s explore the key differences and better understand the relationship between expenditures and expenses:

Expenditure is a Broader Concept

Expenditure refers to any outlay or utilization of monetary resources by the business. Various types of costs incurred in the course of doing business, payments to settle long-term investments or even one-off costs not related to the day-to-day operations are all costs that contribute to expenditures.

Operating Expenditures: 

These are all the periodic payments that are necessary for the existence of any firm including rent, salaries, and utility charges among other expenses. 

Capital Expenditures (CapEx): 

These are the costs or payments that are made to acquire or improve upon the fixed assets of a business such as equipment, property, or research and development. In most instances, capital expenditures can be said to be incurred with the benefits extending to the organization for more than one financial accounting period.

Discretionary Expenditures: 

This refers to expenses incurred in carrying out activities that do not directly generate income for the business e.g. spending money on ad campaigns, sponsoring an event, or organizing out-of-work activities for employees.

Not all expenditures become expenses as certain expenditures may relate to the purchase of investments which may be held longer. For example, capital expenditures are spent first as capital assets and are termed ‘depreciation’ when charged to the income statement in the later years of accounting periods.

Expenses are Part of Expenditures

Expenses are a subset of expenditures. This means every expense is an expenditure, but not all expenditures qualify as expenses.

Expenses: These are the costs that are incurred directly in the running of a business’s everyday activities, such as rent, salaries, utilities, or supplies. Such costs are essential to the ongoing operations of the business and are therefore charged to the income statement in full in the period in which they are incurred.

Expenditures: Expenditures are broader in that they include both expenses and costs incurred on the purchase of capital or non-current investment resources. For instance, if a firm invests in new plant and equipment, it is safely regarded as an expenditure but treated as not an expense. It then becomes an asset whose value over time will be written off as depreciation. 

Effects on Financial Statements

Expenditures and losses differ as they are presented in the financial statements in very important aspects:

Expenses: Expenses affect directly the income statement by depleting the profitability of the company. They are taken up in the respective period that they occur and deducted from the revenue in order to obtain the net income. Thus, expenses affect the company’s profitability for the period.

Expenditures: Expenditures tend to be presented more on the statement of cash flow of the organization as they indicate the cash disbursements of the business that have taken place over a given period. This creates an insight into the liquidity standing of the business, indicating what amounts of cash were utilized within a certain time frame either for operating activities, capital expenditures, or even general outflows of cash for no specific activity.

Examples of Expenditures That Are Not Expenses

There are instances where businesses make payments that qualify as expenditures but are not immediately recorded as expenses. These include:

Capital Expenditures (CapEx): Acquisition of fixed assets for example plant, buildings, and equipment are expenses classification but these costs are capitalized. They are shown as assets in the Balance Sheet and written off gradually. For instance, purchasing a new factory machine is an expenditure but will only be charged to expense after several years of depreciation have been posted on it.

Business Growth: Expenditures made towards purchasing land or buildings for business growth are considered expenditures. However, these do not become expenses until depreciation or amortization of the asset is charged over a period.

Conclusion

For effective financial planning and control, it is imperative to understand the differences between expenditure vs expense. Both controlled costs relate to outflows of resources, but expenses are more immediate and recurrent and relate to the day-to-day running of a business. They are also recorded in the income statement. Expenditures on the other hand are much wider including even long-term investments such as capital assets, which do not appear in the income statement but do have an impact on the cash flow statement and the balance sheet. Every business needs to understand these distinctions as they affect business’s financial choices ensuring better utilization of the business and its future investments.

FAQs

What is the difference between expenses and expenditures?

An expense is a cost incurred by a business in earning revenue. Expenditure is the cost incurred in obtaining property, goods, or services, etc.

Is expenditure the same as an expense?

No, expenditure is more of a general concept and includes all the outflow of money that comprises expenses and capital investment as well.

What are the three types of expenditures?

The three categories of expenditure for business activity are capital expenditure, revenue expenditure, and deferred revenue expenditure.

Can all expenditures be considered expenses?

Not necessarily. While expenses are a type of expenditure related to daily operations, some expenditures, like capital investments, do not directly impact the income statement as expenses.

What is fixed Expenditure?

These are the set amounts that do not change, regardless of how much of the service they are using, for example, rent or mortgage payment

What is an example of expenditure that is not an expense?

Capital expenditures, such as purchasing machinery or buildings, are expenditures that are capitalized as assets and not expensed immediately.

What is discretionary expenditure, and why is it important?

Discretionary expenditure is involuntary and consists of expenses such as marketing or recreational activities for the employees. It is useful because, unlike other expenses, it can be scaled down according to the prevailing business conditions.

Expenses are the one word that every finance team member is aware of and often views them as the enemy that needs to be controlled.  And for startups, expense management is a huge aspect of not only profit margins but continued operations and even reputation management to a certain extent. However, as we know that not all expenses are the same.

In a typical business, you have operating expenses that have an effect on the operations of the company. These include direct expenses like raw materials and other supplies. Then there are the indirect expenses or overheads like rent, utilities, taxes, subscription costs, etc. In this article, we will not be looking at any of these expense categories but we will look at non-operating expenses. While these are not regular payments that mostly may not occur all the time, it has an effect on the cash flow among other aspects.

How do non-operating expenses affect your business?

Cost of finance: In other words, the interest you pay on the finance you arrange comes under the category of non-operating expenses. However, this is one of those payments that need to be paid on a regular basis until the loan has been completely paid off and will need to be considered for cash flow planning.

Expenses related to restructuring: In many companies, restructuring the teams and the way they operate is the norm and in others, it happens due to the circumstances. These expenses could include changes in salaries, incentives, and severance pay if any.

Settlement of lawsuits: While legal fees that you pay to your legal counsel comes under operating expenses, one-time settlements for lawsuits do not. These are considered non-operating expenses and will be classified as such.

Difference in currencies: When a business deals with multiple currencies across the globe, this can happen. Usually, the pricing of the project is based on the currency value at the time of planning with a bit of factoring for fluctuations. However, when there are major fluctuations, these can be considered non-operating expenses.

Force Majeure losses: Losses that occur due to disasters or causes beyond control are often compensated through insurance. However, the company may have losses on some assets that are not insured and these will come under the non-operating expense category.

Inventory write-off: Companies spend a lot of effort and time on planning their inventory levels. However, there can be circumstances where the stocks are sold for lesser prices or wasted in some manner. Once again, the expenses incurred due to this will be considered non-operating costs.

Account method changes: Companies are known to change their method of accounting due to many factors. When this happens, there could be extra costs involved, which will not be part of operating expenses as they are a one-off and not related to the core business.

From a purely financial perspective, it is important to recognize which expenses fall under the category of non-operating expenses and add them to the right place on your financial statement. There are many reasons to do these and some are given below.

Financial clarity: When a financial institution looks at your financial statements, they look at revenue and expenses to determine the loan amount and terms of the loan. Clear entry of non-operating expenses showcases the ability of your business to meet loan repayments.

Stakeholder transparency: As a business, you have many stakeholders who rely on the financial data you provide to make informed decisions. With the clear marking of operating and non-operating expenses, you can provide them with the clarity they require.

Cash flow planning: At the core of any financial planning is the determination of how much funds the business is going to need for a particular time period. With clear demarcation and categorization of expenses, you can plan your cash flow with ease.

At EnKash, we believe that good financial planning starts with excellent spend management and as Asia’s 1st and smartest spend management platform, we enable our customers to manage their finances well.