Definition of 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.
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.
Examples of Expenses and Payments
The following are some examples of expenses that will not require a payment in the current accounting period:
- Depreciation expense for equipment that was paid for in a prior year
- Insurance expense for which the premium was paid in a prior year
- Cost of goods sold from the sale of inventory items paid for in a prior year
- Emergency repairs that were done on December 29, but will be paid when the bill arrives in January
The following are a few examples of payments that will never be an expense:
- A payment of $100,000 to purchase the land adjacent to a company
- Payments that are cash dividends to stockholders
- Principal payments to reduce a loan payable
- Payments to remit payroll tax withholdings
Examples of payments that will be expenses in a future accounting period(s):
- 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 the following accounting period
