What is an expense

An expense is something you have to pay for. An expense can, for example, be a bill you have to pay for a product or service you have purchased, or it can be VAT your company has to pay, taxes or fees. A common feature is that expenses cause money to leave the company’s bank account.

In everyday language, an expense is also often called a payment. The expense or payment is made to reciprocate the service or product you have received, but in accounting, it is not quite the same.

You call it an expense when you receive the payment request and a payment at the time it is paid. We differentiate it in accounting because an expense and a payment can occur on different dates.

What is the difference between an expense, a payment, and a cost?

In the world of economics, a distinction is made between an expense, a payment, and a cost. It is called an expense when you buy a product or service, a payment when you pay for the purchase, and a cost when you use what you have purchased.

You can receive an invoice for rent for January to March with an invoice date in December and due in January. Then the expense is in December, the payment is in January, and the cost is distributed between January, February, and March. This is called accrual accounting.

Accrual accounting simply means moving purchases, sales, and the like from one period to another in the accounting. You have to do it to pay the correct taxes to the authorities and to make it visible what the company has purchased and earned.

An example is if you rent commercial premises and pay rent in advance. You pay the rent in December and book it in the same month, but since you used the premises in January, you must record the transaction in January.