Expenditure

An expenditure is defined as the purchase of goods or services that are expected to have an economic benefit during a specified period. 

These expenditures may include buying office supplies, renting equipment, hiring employees, paying for consulting services, and leasing space.

What is the Difference Between Expense and Expenditure? 

An expense refers to a situation in which money is spent, but where there is no return of value. 

Whereas expenditures refer to spending money and receiving some sort of direct or indirect value for this spending.

What are the Types of Expenditures?

The three types of expenditures are Capital Expenditure, Revenue Expenditure, and Deferred Revenue Expenditure.

Capital Expenditure

  • Capital Expenditures are expenses that are expected to provide returns over a long period. 
  • Capital Expenditures can be intangible or something that exists in physical forms, like equipment, machinery, or other assets.

Revenue Expenditure

  • Revenue Expenditures are expenditures that are expected to be recovered within one year as they relate to the sale of goods or services.
  • Examples of Revenue Expenditures are advertising costs, food for catered events, etc.

Deferred Revenue Expenditure 

  • Deferred Revenue Expenditures are costs that have been paid for by customers, but that will be expensed later because the revenue from this payment has not been earned. 
  • For example, if an organization decides to lease or buy office space, they may choose to leave the furniture in the space for more than one year.

Fixed Expenses and Variable Expenses 

Fixed Expenses differ from variable expenses in terms of the size of their variations.  Fixed Expenses are expenses that do not vary based on changes in production or sales, etc. Fixed expenses do not change and these include rent, energy bills (electricity or water), and taxes. 

Variable Expenditures are those that fluctuate with changes in production levels or increases or decreases in revenue. Variable expenses may change periodically but they are under the control of the organization’s management team. 

Why are Expenditures Important? 

Expenditures are important to an organization because they help managers make decisions about their company’s financial statements and operations. 

Expenditure information helps you answer questions such as whether your business is making enough revenue to cover its costs, whether your business is spending or investing in enough capital, and whether the organization is making wise use of money.

How to Calculate Expenditures?

When calculating expenditures, you must include both current and deferred expenditures, as well as capitalized expenditures.

There are three ways to calculate Expenditures: Expenditure Approach, Matching Approach, and Cost-Benefit Approach

Expenditure Approach 

  • In the Expenditure approach method, all expenses that have been incurred for a certain period are totaled together in one category. 
  • Examples of these expense categories might include salaries, rent, machine maintenance fees, legal services, etc.

Matching Approach 

  • This approach is exactly what the name suggests: Expenditures are recorded when they match revenue or expenses during a specific period. 
  • For example, if a company provides food for an event that takes place in January, but the revenue from this event won’t be received until February, then expenses should only occur when the revenues are realized. 

Cost-Benefit Approach 

  • The Expenditures in the Cost-Benefit approach are calculated by adding up all Expenditures for assets, less the value of assets sold during the period under review. 
  • Expenditures that are not fully consumed within one year should also be included in this category. 

Final Thoughts

Expenditures are important in the accounting equation because they help us to determine whether a business is making enough revenue to cover costs and if their money is being used wisely.

Expenditure information also assists companies in evaluating financial performance and makes it possible for managers to make decisions about their company’s future.

Expenditures are costs that have been paid by customers, but they will be expensed later because this revenue has not been recognized. If the revenue expenditure is not expected to be consumed within one year after purchase, then it can be considered a deferred Revenue Expenditure.
An Expenditure is recorded when a company has paid for something, whether it is tangible or intangible. Expenditures are also known as expenses. Expenditures can be either current or deferred Expenditures.
There are three main types of Expenditures: Current Expenditure, Deferred Expenditure, and Capitalized Expenditures.
Expenditures are important to an organization because they help managers make decisions about their company's financial statements and operations. Expenditure information helps you answer questions such as whether your business is making enough revenue to cover its costs, whether your business is spending or investing in enough capital, and whether the organization is making wise use of money.
Expenditures can be calculated by adding up all expenditures for assets, less the value of assets sold during the period under review. Expenditures that are not fully consumed within one year should also be included in this category.
True Tamplin, BSc, CEPF®

About the Author
True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, his interview on CBS, or check out his speaker profile on the CFA Institute website.

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