Expenditure vs. ExpenseDifferences You Need to Know Between the Two!

Written By:
Adiste Mae

Business owners are always wary of two things when running their business: Revenues and Expenses.

Revenues refer to the money that a business earns in the course of business operations while expenses refer to the money that a business spends in order to generate revenues.

Expenses and Expenditure play an important role in the profitability of the business.

Essentially, the cost of running the company should not exceed the revenues that they produce.

When preparing the Income Statement, when companies are able to classify expenses and expenditure, they will be able to make the most out of tax deductions. 

Essentially, expenses are the costs that need to be incurred for the business to operate while an expenditure refers to costs that maximize the long-term value of the business.  

What is an Expenditure?

An Expenditure helps businesses improve the long-term value of the company and it can be categorized as Capital Expenditure and Revenue Expenditure. 

When a company pays for advertising, rent, or salaries, the benefits derived from these are gone as soon as they are paid.

Expenditure does not work that way – the benefits still flow to the company even after they have been paid, and continue to do so for years more. 

A fixed asset purchase like machinery, equipment, vehicle, or land is a one-time purchase.

Long after these assets have been paid, they still add value to the company.

A fixed asset purchase is considered Capital Expenditure.

For example, Furniture Express did not expect a sudden demand for their products and needed a bigger warehouse and workshop for their additional employees so instead of leasing, they decided to purchase a new workshop for $1,500,000. 

Although Capital Expenditures cost a huge amount of money upfront, the benefits that are expected from the purchase will be for years.

Unlike Expenses, Capital Expenditure is not reported in the Income Statement.

Instead, it is reported in the Assets section in the Balance Sheet.

And while the purchase of the warehouse is recorded as a capital expenditure, the depreciation of the warehouse and necessary maintenance expenses are recorded as Revenue Expenditure.

This will be written off by the company throughout the life of the fixed asset. 

What is an Expense?

An expense refers to the costs that a company incurs so that the company can operate and produce the goods or services needed to generate revenue.

Expenses incurred can be in the form of physical goods purchased or efforts done.

Either way, it must be necessary and ordinary to be considered as a tax-deductible expense. 

Necessary expenses are those that are typically incurred in the line of industry that the business has and to be considered as an ordinary expense, it must be those that aid the business in the revenue generation. 

Expenses are reduced from the company’s income and lower the taxable income of the company.

A snapshot of the company’s revenues and expenses will provide the company with an idea of the overall financial health of the business. 

Key Differences Between Expenditure and Expense

• Expenses are incurred for the business to operate and generate revenue. Expenditure is incurred to add value to the company. 
• Expenses are shown in the Income Statement while expenditure is shown in the Balance Sheet. 
• Capital Expenditure is a one-time purchase of a fixed asset while the cost incurred in the depreciation and maintenance expenses is a Revenue Expenditure. 
• The benefits derived from incurring an expense stop when it is paid. The benefits derived from expenditure continue even after it is paid. 

Cost of Goods Sold

The cost of producing the product is recorded under Cost of Goods Sold.

Expenses such as cost of materials, purchase of goods for resale, labor cost, freight, etc. are recorded under Cost of Goods Sold (COGS). 

Operating Expenses

Operating Expenses can further be classified as Fixed Operating Expenses and Variable Operating Expenses.

Fixed operating expenses are those that a company must incur each month such as rent, salaries, etc.

Variable operating expenses are those that a company may or may not incur and could be advertising, travel, or sales commissions. 

Depreciation and Amortization

When a business purchase fixed assets, the cost of the purchase is not recorded as an outright expense but is instead capitalized.

Depreciation is the process of reducing the value of an asset over its useful life.

The useful life is the period of years the asset is expected to be useable.

Depreciation is used to bring down the value of physical assets while amortization is used for intangible assets. 

Non-Operating Expenses

These are expenses that are incurred but do not provide revenue to the business.

Examples of non-operating expenses are interest expenses from loans and tax expenses.