The difference between expenses and payments
/What are Expenses?
Expenses are costs that have been consumed. There are many types of expenses, including the cost of goods sold, rent expense, compensation expense, and utilities expense. Expenses are deducted from revenues to arrive at the profit or loss generated by a business. Expenses are classified as either operating expenses (which are associated with the day-to-day functions of a business) or non-operating expenses (which are unrelated to a firm’s core business activities).
What are Payments?
Payments are the disbursement of cash. Payments are made both externally, to suppliers and governments, and internally, to employees. Payments may also be made in the form of dividends, to investors.
Comparing Expenses and Payments
The difference between the two concepts is mostly a matter of timing. For example, a business buys merchandise and pays for it in January, but does not sell it until February. This means that the payment occurs (in January) before any expense is recognized (in February). As another example, a delivery company buys a delivery van for $50,000 with a cash payment, and then charges its cost to expense over the next five years through depreciation. In this case, there is quite a lengthy delay between the payment and the expense.
Related AccountingTools Courses
It is also possible for an expense to be recognized before a payment. For example, a computer company receives an advance payment from a customer before it even builds the machine, while it pays its suppliers on 30-day terms. In this case, it recognizes the cost of goods sold expense for the computer before it issues a payment on the associated computer parts.
Another variation is when a payment is not associated with an expense at all. For example, when a business pays $200,000 for a parcel of land, there is no corresponding expense, because land cannot be depreciated. As another example, a company withholds payroll taxes from employee paychecks and remits these taxes to the government; the firm is making a payment, but never incurs an expense, because it is acting as an agent for the government. As a final example, a board of directors authorizes a dividend payment to shareholders; this is a payment but not an expense, since it is merely a transfer of retained earnings to shareholders.