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An expenditure is a purchase of services or goods. Everyone experiences expenditures in their day-to-day activities, like buying groceries. However, in business and accounting, expenditures are a bit more complicated.
In this guide, we’ll go over:
- Expenditure Definition
- Types of Accounting Expenditures
- Expenditure vs. Expense
- Showing You Understand Expenditures on Resumes
- Related Accounting Skills
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Expenditure Definition
An expenditure is simply a purchase of products, goods, or services. Anyone can incur one: Buying a coffee, making an Amazon purchase, and hiring a lawn care company are all examples of expenditures you might encounter in your day-to-day life.
However, in business, expenditures are more specific. Expenditures are purchases that benefit the company. For example, buying a new printer for the office can be an expenditure. Businesses also have to record these expenditures carefully to ensure their accounting records stay accurate. These purchases are recorded at the time of purchase, typically using an invoice or a sales receipt as proof.
Who Deals With Expenditures?
While many people in a company make expenditures, accountants are responsible for tracking and recording these purchases. Companies want to make sure they aren’t spending more than they make, so accounting involves comparing daily expenditures against overall profits to prevent losses.
>>MORE: Learn more about what accountants do.
Types of Accounting Expenditures
In accounting, there are three main categories of expenditures: capital, revenue, and deferred revenue.
Capital
A capital expenditure (often referred to as CapEx) is a purchase the company will use for more than one year. CapExs are typically larger investments in assets to grow the business, such as purchasing new machinery to increase production or acquiring a competitor to take over more of the market.
Companies often use debt or equity financing to pay for capital expenditures. Because these purchases have a long-term benefit to the company, the actual cost to acquire the asset is spread out over the item’s lifetime. For example, if a company pays $5,000 for a machine expected to be useful for five years, rather than listing that as a $5,000 purchase in the first year, it will be recorded as a $1,000 deduction each year for five years.
Revenue
A revenue expenditure is a purchase the company will use for less than one year — the flip side of a capital expenditure. These are short-term purchases for daily operations and are similar to a company’s operating expenses.
A common type of revenue expenditures are raw production materials that a company repurchases every few weeks. For example, if a cake company needs to purchase eggs, milk, butter, and other non-shelf-stable ingredients for its daily production, those transactions are recorded as revenue expenditures.
Deferred Revenue
Deferred revenue expenditures are pre-paid purchases that the company uses for less than one year. For example, imagine if the cake company from the above example paid its egg supplier two months in advance so that the supplier would deliver fresh eggs every week. The eggs that have been paid for, but not yet delivered, count as a deferred revenue expenditure.
Expenditure vs. Expense
The difference between an expenditure and an expense is subtle but important in accounting. While an expenditure is the total cost of the purchase, an expense is how much that purchase offsets a company’s revenue.
For example, let’s say a company purchases a $5,000 piece of machinery and expects to use this machine for five years. The capital expenditure is $5,000, but the actual expense is only $1,000 every year for five years. So, the initial investment is recorded as an expenditure, but the machine is expensed over the course of five years.
The easiest way to think of this distinction is that an expenditure is just the money spent, while an expense is how the expenditure is paid for.
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Showing You Understand Expenditures on Resumes
Ultimately, there isn’t one way to show potential employers that you understand expenditures and how they operate within a company’s financial structure. Because expenditures are such a fundamental aspect of finance and accounting, it is likely assumed you understand it if you have accounting or business experience.
However, you can use your experience with expenditures to boost other skills. For example, you can call out an instance where your knowledge of generally accepted accounting principles (GAAP) and attention to detail caught a mistake in an expenditure report, saving the company from an expensive mishap.
>>MORE: Check out the accounting skills you need on your resume.
Accountants should understand how an expenditure affects a company’s overall financial status. Other things for accountants to know when looking at a business’s finances are:
- The role of financial statements, like cash flow statements
- How to calculate contribution margins to measure profitability
- The formula for determining a company’s weighted average cost of capital (WACC)
- How net working capital (NWC) impacts a business’s short-term liabilities
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Written by
McKayla Girardin→
Writer
Read more from McKayla Girardin
McKayla Girardin is a NYC-based writer with Forage. She is experienced at transforming complex concepts into easily digestible articles to help anyone better understand the world we live in.
