Expense vs. Expenditure: What’s the Difference? (2024)

Running your business costs money. You have to pay your employees, buy raw materials forproducts you sell and market your services. Keeping track of your expenses not only helpsyou see the financial health of your business and plan for the future, many businessexpenses can be written off for tax purposes. But not all expenses are treated the same.

Expense vs. Expenditure: What’s the Difference?

Understanding the differences between expenses and expenditures can help you accurately listinformation on your financial statements and maximize your tax deductions. Simply put,expenses revolve around what delivers revenue and allows your company to operate day to day.Expenditures help create long-term value around your business.

What is an Expense?

An expense is what you spend on the goods and services to keep your company running. Expensescan be for physical items, such as a furniture maker buying wood to make chairs. Or they canbe other efforts that help drive your company toward revenue, like the commission you pay asalesperson.

Many expenses are tax deductible, or costs that can be subtracted from your overall grossincome, reducing your tax liability at the end of the year. For an expense to be taxdeductible it needs to be “ordinary and necessary.” To be considered ordinary,the expenseneeds to help your company generate revenue. And to be necessary, it must be something thatis commonly accepted in your particular industry.

On an income statement, expenses are offset by revenue or other forms of income. By seeingyour expenses and your revenue over a period of time, you get a snapshot of the financialhealth of your company.

What is an Expenditure?

Where expenses are purchases to increase revenue, expenditures are madeto improve the long-term value of the company. There are two types of expenditures: revenueand capital.

Capital expenditures are one-time purchases like vehicles, machinery or real estate that addvalue to your business. These are also sometimes known as fixed assets. For example,Bill’sPrinting buys a new building to accommodate growth and house new printers. This costs money,but also adds long-term value in the form of real estate to the business. So, it’streateddifferently than a business expense like advertising a weekend sale on paint. This purchasewill not be an expense on the print shop’s income statement. Instead, it will appearon thecompany balance sheet, which essentially is a list of what your company owns and what itowes.

Another way of looking at it is after expenses are paid, the purchase no longerdelivers value to the company. But after capital expenditures are paid for, theycontinue to deliver value to the company. For example, after Bill’s Printing bought anewtruck, they continued to use that truck for many years after the accounting year it waspurchased.

Let’s take a look at another type of expenditure. Bill’s Printing buys a newprinter for$100,000. The initial cost is adding long-term value to his business and is a capitalexpenditure. However, this new printer has to be serviced once a quarter and it costs $1,000to do so. Additionally, the new printer loses value over time. For example, if Bill wantedto sell the printer after 10 years of owning it, he would not be able to recoup all$100,000. He might get half that. The value lost, along with the maintenance of this pieceof equipment, is known as a revenue expenditure and can be written off over the lifetime ofthe printer.

Key Differences Between Expenses and Expenditures

The bottom line is:

• Not all expenditures are expenses.
• Some examples of expenses are rent, utilities and salaries.
• Expenses generate revenue and keep the day-to-day operations of your business running.
• Capital expenditures are used to increase the long-term value of your company. Someexamples include equipment and buildings.
• The maintenance and depreciation of some capital expenditures can be expensed—orwrittenoff. This is called a revenue expenditure.
• Expenses appear on income statements. And capital expenditures show on balance sheets.

Expenses and Expenditures in Financial Reporting: Income statements, alsoknown as a profit and loss statement, look at revenue and expenses over a specificaccounting period—usually three months. These financial reports help you better seehow yourbusiness is performing and whether you need to make changes to meet important financialbenchmarks. And the income statement is where expenses are reported. Each income statementwill have a few features.

Cost of Goods Sold (COGS): This is how much it takes to produce the itemsyour company sells, including materials, labor, freight costs, etc. There are various waysto calculate this, depending on your industry.

Operating Expenses: This is where you track everything that goes into theday-to-day running of the business. It also includes expenses associated with maintainingand running physical assets. Fixed operating expensesinclude things like rent and salaries. There are also variable operating expenses, such assales commissions or the costs of marketing.

Depreciation & Amortization: While capital expenditures do not appear onthe company’s income statement, some can be depreciated or amortized as expenses ontheincome statement over time. Rather than write-off a large expense in one year, depreciationis the process of deducting the value over multiple years during the life of the purchase,giving you more control of your expenses. Straight-line depreciation takes the total cost ofthe item and divides it by its lifespan to expense part of the asset on the incomestatement.

The new truck Bill’s Printing bought cost $40,000. Bill expects to use that truck forfouryears, which means he will expense $10,000 per year on his income statement and remove thatsame amount from his balance sheet. Depreciation applies only to physical assets, andamortization is the same concept that applies to intangible assets like trademarks andpermits. You calculate the depreciation expense based on a variety of factors, includingwhat the IRS permits based on the type of expenditure.

Non-operating Expenses: These are expenses associated with a peripheralbusiness activity that you have to make, but don’t directly drive revenue, such astaxes andinterest paid on loans.

Business accounting software can help you efficiently track your expenses and expenditures,as well as generate your income statement and balance sheet. This software is used at everyskill level—and there are even training programs tolearn how to better utilize the applications.

Managing Expense and Expenditures with Accounting Software

Keeping track of everything manually can be overwhelming, even for small businesses and startups.Going paperless and buying accounting software should be one of the first steps you takewhen starting your business, or when you’re looking for ways to make it moreefficient. Infact, the U.S. Small Business Administration says the first bookkeeping step you should takewhen launching a company is to get business accounting software. They even list that beforeopening a business checking account and tracking sales. Financial management software isessential for tracking revenue and expenses, and generating financial reports, and trackingthe financial health of the business. And as your business matures, managerial accountingsoftware can scale with your growth and even provide forward-looking analyses and reports.

Learn more about financial and accounting formodern companies.