Difference between Expenditure and Cost. When does an expenditure become a cost? In daily speech, these words are used to mean the same thing, but in accounting, there are important differences between these terms and words.
Expense
Expenditure: When you purchase a service or a product you have an expenditure. When you receive a supplier invoice the expenditure is recorded and becomes an expense. An expenditure is a payment or disbursement.
Costs
Cost: Costs are associated with spending, but the cost is linked to a particular period. Accountants use the word expense when a cost is used up while the company is doing its main revenue-gathering activities. “The cost has been expensed to the ledger”. A cost is thus a periodisation of expenditures. It distributes the cost to the period or periods that the cost relates to. A common example is a rent that must be distributed each month even if you paid one quarter in advance. Then you have to split the cost into three parts that fall into each month. A cost may also arise when you have received goods that or when services have been performed.
Expense: Expenses are costs that have expired or were necessary to obtain revenues during a specific time period. Costs and expenses are connected to a period while expenditures are connected to the cash-flow.
Payments
Payout (payment): This occurs when you pay your supplier invoices, at the same time the account payable debt decrease when using the accrual accounting method.
Please note: When you use the cash method, all four terms (expenditure, cost, expense, payout) are baked together, and happens at the same moment as the payment. It also means that VAT is recorded when the payment is done (Cash accounting for VAT).
See also:
VAT reporting – Accrual method vs Cash method
