What is the difference between expenses and payments?

Under the accrual method of accounting, expenses are costs that have been used up or have been incurred in the process of earning revenues and/or operating a business. For example, a retailer will report its cost of the goods sold as an expense of the period in which the related sales occurred (even if the retailer has not yet paid for the goods, or had paid for the goods in an earlier period). Some expenses are allocations of a cost that was paid in an earlier period (e.g. depreciation of an asset purchased in a previous year, the allocation of a 6-month insurance premium). Expenses also include costs incurred in the current period that will be paid in a later period (e.g. current advertising that will be paid for in the next accounting period). Interest on a loan is a daily expense even though all of the interest will be paid when the loan comes due in the next accounting period.

A payment is a disbursement of money (usually in the form of a check or currency). Some payments are current period expenses (e.g. current month's rent payment) but many payments are not expenses of the current period. Here are a few examples of payments that are not expenses:

  • a payment of $100,000 to purchase the land adjacent to a company will never become an expense
  • payments that are cash dividends to stockholders will never be a corporation's expense
  • principal payments to reduce a loan payable will never be an expense
  • payments to remit payroll tax withholdings will never be an expense
  • payments to reduce liabilities resulting from expenses reported in earlier accounting periods (e.g. payments to reduce interest payable, accounts payable, taxes payable)

Some current period payments will result in expenses in future periods:

  • payments for construction of a building that will be put into service next year
  • payments for an exhibit at next year's trade show
  • payments for services to be received in a future accounting period

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