What is an Expenditure?

An expenditure is a payment or the incurrence of a liability in exchange for goods or services. Evidence of the documentation triggered by an expenditure is a sales receipt or an invoice. Organizations tend to maintain tight controls over expenditures, to keep from incurring losses.

A capital expenditure is an expenditure for a high-value item that is to be recorded as a long-term asset. A business usually sets a capitalization limit (or cap limit) for classifying expenditures as capital expenditures. A cap limit is established in order to keep an organization from recognizing low-cost items as fixed assets (which can be time consuming).

The Difference Between Expenditure and Expense

There are several differences between an expenditure and expense, which are as follows:

Scope difference. An expenditure can involve the purchase of an asset, while an expense more narrowly refers to the cost that is charged to expense within a reporting period.
Impact on the financial statements. An expenditure can result in an asset appearing on the balance sheet or an expense appearing on the income statement, while an expense only appears within an expense line item on the income statement.
Timing difference. An expenditure occurs at the moment when a purchase is made, while an expense refers to when a cost is recognized (which might be substantially later).

There is no significant difference between the two terms when an expenditure automatically triggers the incurrence of an expense; for example, office supplies are typically charged to expense as soon as they are procured. Conversely, the advance payment of rent is an expenditure, but does not become expense until the period has passed to which the rent payment applies.

The Difference Between Capital Expenditures and Revenue Expenditures

A capital expenditure is made when a fixed asset is acquired. A fixed asset is expected to provide value for a business for an extended period of time, perhaps more than a decade. During that time, the fixed asset may contribute to the generation of company revenues, such as when a machine in the production department is used to produce goods for sale to customers. A revenue expenditure is made in order to generate a specific revenue transaction, or to be consumed within a specific operating period. For example, the cost of goods sold can be considered a revenue expenditure, as can a maintenance expenditure.

In short, a capital expenditure is intended to cover a longer period of time than a revenue expenditure. Also, capital expenditures are charged to expense via depreciation over an extended period of time, while revenue expenditures are charged to expense very quickly.