An expense is something you have to pay, such as an invoice from your supplier, or consumption tax you owe to the tax authorities.
Expenses are costs your business has. When you pay the expense, money leaves your company’s bank account.
An expense can also be referred to as a payment or a cost, however when it comes accounting they’re not the same thing.
An payment in accounting
When we talk about accounting, there’s a difference between an expense and a payment: it’s an expense when you receive the payment request, the invoice, and a payment when you actually pay for the product or service.
The reason we differentiate between the two, is that they usually occur on different dates. You might get a payment request in February, but you pay in March. If so, you would bookkeep the expense in February, and the payment in March.
What’s the difference between expense and cost?
Like we said, it’s an expense when you get the payment request, a payment when you make the payment. And it is a cost, when you use the product or service you’ve purchased.
Let’s take a look at an example. If you receive an invoice in December for the rental of office spaces for January-February with a due date in January, you would bookkeep it like this:
It would be an expense in December, when you receive the invoice
It would be a payment in January, when you pay the invoice
It would be a cost distributed between January and February, when you use the office space.
This is called accrual accounting and is part of the accounting principles.
Accrual accounting simply means moving purchases, sales and so on from one accounting period to another. The reason you do this is to pay the correct taxes to the tax authorities and to accurately show what your business has purchased and earned.
Confused? You can always reach out to an accountant to get help with your accounting.