Difference between expense and payment

comparisons

A payment is the payment of an amount of money destined to extinguish an obligation. While the expense is voluntary, since we can consume or not, the payment is that amount of money that will defray an obligation.

An expense means a decrease in equity due to the purchase of a good or the demand for a service. It is posted to the income statement. When we talk about spending we are talking in economic terms.

On the other hand, a payment means an outflow of cash for the purchase of a good or the demand for a service. It is posted to the balance sheet. When we talk about payment we are talking about financial terms.

It is very important to differentiate these concepts to keep a correct business accounting.

Example of the difference between expense and payment

To make it clearer, we are going to see the following example:

A toy company buys 1000 kg of plastic from a supplier to make a new children's toy at a price of € 1 / kg. From here, we can find ourselves in two situations, that the payment is deferred or in cash. If there is a deferred payment, this purchase will incur an expense of € 1000. Therefore, it will produce a decrease in your assets. Now, buying on the term means that you will probably pay it back in 30, 60 or 90 days, depending on the agreement with the supplier. That is why it is not a payment but an expense. If the purchase takes place near the end of the year, it is possible that the payment of the € 1000 will occur the following year. When the toy company finally pays for the purchase of the plastic, we can say that the payment has occurred because there has been a cash outflow, that is, a decrease in the company's treasury.

From this example we can extract the following observations:

  • An expense does not have to be a payment, nor vice versa.
  • It is possible for an expense and a payment to occur simultaneously. This will happen when the payment is in cash.

In short, an expense does not mean that the company pays for the good or service acquired, only the corresponding accounting entry will be made, but not as a payment -unless it was in cash- while a payment occurs when the company pays - worth the redundancy - for the good or service purchased, either in cash, by check or by bank transfer.

It is also very important to know the difference between income and collection.

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