29 May What is an Expenditure?
An expenditure is a payment in cash or the promise to pay at a future date. It could be made towards an operational expense or for the acquisition of a capital asset.
What does expenditure mean?
A company needs to incur expenditure to run its business operations. The nature of expenditure could be in the form of payment of wages, purchase of raw materials, or the amounts to be spent towards rent, electricity, and administrative costs.
Expenditure is also incurred for the acquisition of capital assets. A manufacturing firm may need to buy machinery and equipment to produce the goods that it sells. Capital expenditure may also involve the purchase of land and buildings.
It’s important to differentiate between expenditure and an expense. When a company incurs an expenditure it is not necessary that it also incurs an expense. For example, a firm may buy equipment worth $100,000.
This is a capital expenditure that will result in depreciation being charged over the useful life of the asset. In this case, depreciation, which is an expense, would be incurred over several years.
However, at times, an expenditure and an expense may take place simultaneously. Say, a company incurs a minor cost of $300 towards repair charges for its equipment. This expenditure is an expense as it involves a small amount and the benefit accrues immediately.
On the other hand, a firm may pay rent for its office in advance for the next three months. This would be recorded as an expenditure, but it would become an expense only in the relevant months.
Example of expenditure
The following are examples of revenue expenditure:
- Wages paid to workers
- Interest cost of loans
- Raw material costs
- Depreciation on fixed assets
- Insurance expenses
- Advertisement expenses
Here are several different types of capital expenditure that a firm may incur:
- Land and buildings
- Capital equipment
- Office furniture
- Computer equipment and software
- Trucks used for making deliveries
Companies incur expenditure to acquire assets and to run their operations. It is important to differentiate between capital and revenue expenditure and to maintain an accurate record of both.