What is an Expenditure?

//What is an Expenditure?
What is an Expenditure? 2017-10-04T08:05:00+00:00

Definition: An expenditure is funds used by a business, organization, or corporation to attain new assets, improve existing ones, or reduce a liability. In other words, it’s the use of a resource in the operations of a business.

What Does Expenditure Mean?

What is the definition of expenditure? These are payments of currency or barter credits for necessary inputs (goods or services). This could be anything from purchases equipment to hiring employees. Obligatory settlements or payment of liabilities such as invoices, receipts, and vouchers can also be considered expenditures.

Capital expenditures are associated with fixed assets and other long-term investments. In order to be considered a capital expenditure, the asset’s benefits must extend more than one fiscal year.

According to the accrual basis of accounting, expenditures are recorded when they are incurred, not necessarily when they are paid. Thus, an asset might be purchased in year 1 but not paid for until year 2. The expense is still recorded in year 1, however, because the asset was purchased and possession was transferred in year 1.

Let’s look at an example.

Example

Let’s assume that Jim is purchasing a building for his law firm. Jim walks through the building in November and agrees with his real estate agent that the building will be perfect. He makes an offer of $500,000 for the building in December. The seller accepts the offer in January and the building inspection, appraisal, and insurance come through by the end of February. In March, Jim closes on the building and signs a mortgage with the first payment being due May 1. When does Jim record the capital expenditure?

Jim should record the building purchase in March because that’s when he legally owned the building. To record this transaction, Jim would debit the building asset account and credit the mortgage account for $500,000.

In the world of manufacturing, machinery is consistently changing and improving. The machinery a company uses to produce its goods may become obsolete in a few years. This is common with CNC machines. When a piece of machinery becomes irrelevant to its original purpose and it is no longer useful, upgrades become necessary. These upgrades are considered expenditures.

Summary Definition

Define Expenditures: Expenditure means the use of cash or cash equivalents to purchase assets, pay down debt, or fund operations.