Expenses and liabilities both represent an outflow of funds either to be incurred in the current period as an expense, or to be settled on a future date, in the case of a liability. The terms ‘expense’ and ‘liability’ represent different components in a company’s financial statements, and are different to each other because of the components that are included under these two categories and the features and characteristics that make up a liability or an expense. The article will show the reader how these liabilities are distinguished from expenses, and how they affect a company’s financial statements.
What are Liabilities?
Liabilities are recorded in the company’s balance sheet and are divided into long and short term depending on the length of time of the liability. Long term liabilities are owed by a firm for more than one year, and short term liabilities are for less than one year. Examples for liabilities include payments to be made to creditors, bank over drafts, accrued rent, accrued electricity, and other amounts that are owed by the firm. Liabilities will help a firm obtain benefits now for which payment will be made in the future, and this will allow a firm to expand and continue business activities even if they cannot pay for it currently. It is vital for a company to keep its liabilities under control, and maintain sufficient assets to cover the amount of liabilities so that in the event of liquidation the firm will have enough assets to pay off their obligations.
What are Expenses?
Expenses are the costs that businesses incur in the day to day business activities. Expenses are incurred in the current period, and payments are made as and when the business incurs the expenses. Expenses are recorded in the company’s income statements, and they reduce the levels of profitability of the firm. Examples of expenses include, wages paid to workers, payments made for supplies purchased, depreciation and utility bills paid. It is essential for a company to keep its expenses under close supervision to ensure that expenses do not keep increasing. Exerting higher levels of control over expenses are important, especially during periods of slowdown in sales and revenue drop, in order to ensure that the company does not end up with a loss for the period.
What is the difference between Liabilities and Expenses?
Liabilities and expenses are both key components that are included in the company financial statements, and represent the outflows of funds to be made during the current period or at a future date. The main difference between liabilities and expenses are the timing under which they are realised. Expenses are incurred, and payments are made during the current period; whereas, liabilities are benefits that are obtained now for which obligations need to be met at a future date. Expenses are recorded in the income statements, since higher the expenses lower the profitability of the firm. Liabilities are recorded in the balance sheet. Liabilities and expenses are both treated with great importance, as liabilities need to be controlled so that the company assets are able to cover liabilities, and expenses need to be monitored so that it does not reduce the company profitability.
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In a nutshell: Expenses vs Liabilities • Liabilities are those for which the benefit is obtained in the present, and the obligation is to be met in the future, whereas expenses are those, which are incurred currently, and payments too are made during the current period. • Liabilities are recorded under the balance sheet, and expenses are recorded in the income statement as it reduces the company profitability. • A company needs to make sure both liabilities and expenses are controlled so that it can manage to pay its debts for the liabilities in an event of bankruptcy, and the company does not face reduced profitability as for the latter. |