liability vs expense
Liability Vs. Expense
In the following Buzzle article the comparison of liability vs. expense has been given, by enlisting a few of their distinguishing points. Keep reading...
Definition
There are no officially stated definitions of an expenditure and a liability. Both concepts are basically common connotations and are understood as per the time frame. Here are the common explanations.
First an expenditure is basically any situation where money becomes payable with immediate effect. However at the same time, it is not always necessary that the money has to be paid immediately. Citing the above example, the time frame of an expenditure is such that a liability does not become an expenditure till the last date of filling the bill. On the whole, when the recipient of the money wants it immediately, or does not want to extend the timeline of the transaction, it is said to be an expenditure. An expense is usually accrued or instantly incurred.
A liability on the other hand does not tend to be an expenditure. In this money is owed to a person, but not payable with immediate effect, it is still payable at a future date. Again citing the aforementioned example, a liability is the point of time when we swipe the credit card, the money remains payable, but not with immediate effect. It becomes accrued and payable at some point of time.It is always posted to the left hand side of any said balance sheet.
Coincidentally, there are three effects or rather permutation or combinations of expenses and liabilities, which tend to cause confusions, accountants define these effects as:
- An unpaid expenditure is a liability
- An expenditure which is yet to occur is also a liability
- Thus every expenditure in itself is a liability and every liability in itself is an expenditure.
- A liability can be an expenditure at first, that is the time when a certain expenditure goes unpaid and is also not claimed. For example, a company fails to pay a said employee his or her salary. If unclaimed, this salary remains to be a liability. The moment it is claimed by the employee, becomes an expenditure. Some common examples of such a category of liability include, all unpaid expenditures, unpaid taxes and unpaid considerations.
- In some cases, liabilities tend to be expenditures. This includes, all bills such as credit card bills. It basically means that we use the services as of now, and pay for them later on. A bill usually arrives in the first week of the month. The bill paid in such a situation is for the services used in the previous months. In such a case, the usage of services creates a month-long liability, which becomes payable on the day when the bill arrives, that is, it becomes an expenditure.
- Thirdly, there are some liabilities that are not expenditure based. For example, the investments by share holders or a secured loan. Such liabilities are always direct liabilities, that is, they never take the form of an expenditure. This case is best observed for the share holder's liabilities. This liability never turns into an expenditure, and even when the company is being wound up, the capital is simply repaid. Dividends and bonus issues are not expenditures and are simply, methods of profit-sharing.
- In case of loans, it must be noted that the interest, fees and Annual Percentage Rate (APR), is the actual expenditure, the total principal amount that has been borrowed is technically a liability.