Expenditure

In accounting, an expenditure is a payment, or the incurring of an obligation to pay, in order to acquire goods, services or other assets. Buying a delivery truck, paying the month's rent and ordering office supplies on credit are all expenditures. What matters for the accounts is not just that money was spent, but what it was spent on and over what period the business will benefit.

Expenditures are divided into two broad types. A capital expenditure buys or improves a long-term asset and is recorded on the balance sheet. A revenue expenditure benefits only the current period and is charged to expense straight away. In US government accounting the word has a further, specific meaning in governmental funds, which use the term expenditures in place of expenses.

When a family buys a car, that is spending. When they buy petrol to fill it, that is also spending. But the two are different: the car will serve them for years, while the petrol is gone by the end of the week.

Accounting records that difference. Spending on something that lasts, like the car, is treated as buying an asset, and its cost is spread over the years it is used. Spending on something used up quickly, like the petrol, is counted as a cost of the current period. Both are expenditures; they simply end up in different places in the books.

The line between the two types affects both the balance sheet and profit:

• Capital expenditures. These include buying land, buildings and equipment, adding a new wing to a factory, and major repairs that extend an asset's life or capacity. They are debited to an asset account and, except for land, expensed over time through depreciation.
• Revenue expenditures. These include wages, utilities, rent, advertising, and ordinary repairs that keep assets working without improving them. They are debited to expense accounts in the period incurred.

Misclassifying an expenditure distorts results. Treating a revenue expenditure as capital overstates both assets and current profit; treating a capital expenditure as revenue understates them. Because the choice can flatter earnings, companies set written capitalization policies and auditors test them.

An expenditure occurs when resources are acquired; an expense is recognized when they are used up in earning revenue. The two often fall in different periods. If a company spends $50,000 on a machine with a five-year life and no salvage value, the expenditure happens in year one, but straight-line depreciation produces $10,000 of expense in each of the five years. Similarly, an annual insurance premium paid in advance is an expenditure when paid but becomes expense month by month, with the unexpired portion held as prepaid expenses.

The reverse also occurs. Wages earned by employees in the last week of December are an expense of that year even if they are paid in January. This timing difference is central to the matching principle and the accrual basis of accounting.

The statement of cash flows reports capital expenditures as purchases of property, plant and equipment in the investing section, while cash paid for revenue expenditures falls in operating activities. Analysts subtract capital expenditures from operating cash flow to arrive at free cash flow, a common measure of the cash a business can return to investors. In planning, companies prepare a separate capital budget for major expenditures, approved through capital budgeting techniques.

State and local governments in the United States follow standards set by the Governmental Accounting Standards Board. In their governmental funds, which use the modified accrual basis, outflows are reported as expenditures when the related liability is incurred, and capital outlays, debt principal repayments and current operating costs all appear as expenditures. The government-wide statements, prepared on the full accrual basis, then convert capital outlays into capital assets with depreciation. This is why public budgets and fund statements speak of expenditures, while business income statements speak of expenses.

• Governmental Accounting Standards Board
• Financial Accounting Standards Board