ExpenditureDefined along with Examples

Written By:
Adiste Mae

What is an Expenditure

Expenditure happens when a company makes a purchase of goods and services at a particular point in time either through cash or credit.

The purchase of expenditure is evidenced by a sales invoice or receipt.

Unlike an expense, the recognition usually happens when the matching revenue is recognized, it is used up, or when it expires.

Expenditure vs Expense

People confuse expenditures and expenses and although they may be similar, there are differences between the two.

Expenditure

An expenditure is recognized when a purchase is made in cash or credit for a product or service.

Simply stated, it is a representation of the disbursement of funds.

For example, a company purchased a piece of machinery for $1,200,000 in cash and has a useful life of 10 years.

This is going to be classified as capital expenditure of $1,200,000.

Expense

Expenses are recorded in the same period as revenues are recognized and as such, they appear in the Income Statement.

In the same example above, the capital expenditure of $1,200,000 and has a useful life of 10 years will record a depreciation expense of $120,000 annually.

Types of Expenditures in Accounting

Expenditures are of two types: Capital Expenditure and Revenue Expenditure.

Capital Expenditure

Capital Expenditure refers to a one-time purchase of a company for the growth of its fixed assets.

In this case, the purchase of fixed assets has a useful life of more than 1 year.

When companies make a purchase of a fixed asset, the intention is always to expand and grow their existing operations in the hopes of generating more revenue in the future.

However, the purchase of these assets requires a generous sum upon purchase (an initial investment) and for this reason, companies acquire them through debt financing or equity financing.

The benefits expected to flow from these assets are spread across their useful life and as such the decrease in the value – depreciation – will also be spread across the useful life of the asset.

Example

Shoes Inc. has met an unprecedented increase in the demand for their shoe products now that they are supplying internationally.

To meet this demand, they have decided to purchase a manufacturing warehouse for $5,000,000 with a useful life of 20 years.

In doing this, they will be able to increase sales by 100%.

Knowing all this information, the company can determine that the benefits expected to flow to the business will be more than 1 year.

The purchase of the warehouse is therefore a capital expenditure.

Over its useful life, a depreciation expense will be recorded thereby decreasing the value of the asset.

Revenue Expenditure

In contrast with Capital Expenditure, money spent on expenses that have a useful life of less than a year is classified as Revenue Expenditure.

These are also referred to as operating expenses – incurred to fund operations of the company.

Difference Between a Revenue Expenditure and Capital Expenditure

Revenue Expenditure is classified as operating expenses – incurred in the time that they are paid for and have a useful life of less than a year.

On the other hand, Capital Expenditure has a useful life of more than 1 year.

The similarity between the two types of expenditure is that when they are incurred, they need to be recorded in that same year and cannot be carried forward to the next year.

Example

In the purchase of the warehouse, the company also needs to hire factory workers.

While the cost of the warehouse is a capital expenditure, the salaries paid to the factory workers are recorded as revenue expenditures.

Deferred Revenue

Revenue is recognized when the product is already received by the buyer.

In some cases, some buyers pay for the product in advance without receiving anything yet.

In the books of the supplier, the cash receipt will not be recorded as revenue but instead, it will be recorded in the books as a current liability of the company under Deferred Revenue.

The recording of the receipt in the Balance Sheet as liability does not affect the profitability of the company.

However, when the related asset is purchased in order to deliver the product to the customer, only then will the related expense be recognized.

Example

X Company is a furniture manufacturer and imports specific types of timber overseas.

In order for their supplier to ensure that the delivery will happen, advance payment from X Corporation is required in full.

Because this supplier is the only supplier for this timber, X Company agrees even when the shipment will only be fulfilled after a year.

When X Company pays the supplier, this payment will be recorded in the books as a Prepayment and in the books of the supplier, it will be recorded as a deferred revenue – to be recognized only as revenue when the shipment is fulfilled.

In the same way, X Company will only recognize expenses when the shipment has been received.