Difference Between Expense and Payment
A payment is the payment of an amount of money intended to extinguish an obligation. While the expense is voluntary, since we can consume or not, the payment is that amount of money that will cover 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 recorded in the balance sheet . When we talk about payment we are talking in financial terms .
It is very important to differentiate these concepts in order to carry out correct business accounting.
Example of the difference between expense and payment
To make it clearer, let's 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 a deferred payment occurs, this purchase will incur an expense of €1,000. Therefore, it will produce a decrease in your assets. Now, term buying means you'll probably pay in 30, 60, or 90 days, depending on the vendor agreement. That is why it is not a payment but an expense. If the purchase takes place near the end of the financial year, it is possible that the payment of €1,000 will occur the following year. When the toy company finally pays for the purchase of the plastic, we can say that the payment has been made because there has been a cash outflow, that is,
From this example we can draw 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 summary, 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 payment -unless it was in cash- while a payment occurs when the company pays -excuse the redundancy- for the good or service purchased, either in cash, by check or by bank transfer.