AboutWarren D. Miller, CFA, ASA, CPA Expertise My in-depth knowledge of economics is confined to three sub-disciplines: Austrian economics, industrial organization, and evolutionary economics. Other questions dealing with macroeconomics, the traditional neoclassical paradigm, labor economics, environmental economics, agricultural economics, health economics, and so on should go to those who have the appropriate expertise.
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Experience I work with Austrian economics (which is different in major respects from the traditional neoclassical model), industrial organization (which is about industry structure, conduct, and performance), and evolutionary economics (almost, but not quite, the economic analog of its biological counterpart) everyday in my work. I appraise closely-held businesses, provide exit-planning services, and offer high-level strategic analysis, advice, and clients to CEOs and owners of mid-sized businesses. Understanding, applying, and writing about these disciplines is an essential part of how I have made my living since 1993.
Organizations CFA Institute, Strategic Management Society, American Society of Appraisers, Institute of Management Accountants, Academy of Management, Culver Legion
Publications CFA Magazine, Strategic Finance, Valuation Strategies, Value Examiner, Journal of Advanced Property Economics, Harvard Business Review, American Fly Fisher, CFA Digest, CPA Expert, and Business Valuation Review, among others
Education/Credentials MBA - Oklahoma State (1991)
BBA - U. of Oklahoma (1975)
Chartered Financial Analyst designation (2006)
Accredited Senior Appraiser (2006)
Certified Management Accountant (1992)
Certified Public Accountant (1992)
Question For purposes of accounting, what is the distinction between an expenditure, expense, cost and charge. For example,
deferred expense(prepaid expense?), deferred cost and deferred charge.
Answer Dear Brian--
Thank you for your question, and thank you for using AllExperts.com. Though Economics is not often a platform for accounting questions, I was a bean-counter in an earlier incarnation and do have CPA after my name, though the last thing I am (or want to be) is an accountant. I'm happy to respond to your request for definitions.
Let me take the accounting terms in the order in which you listed them:
1. "expenditure" - in the private sector, "expenditure" is most commonly associated with "capital expenditure" (a.k.a. "capex"). A capex is an outlay for a long-lived asset. In other words, the outlay is an investment (which is why it shows up in the "Investing" section of the Statement of Cash Flows). For financial reporting purposes, such investment are capitalized on the balance sheet (typically under Fixed Assets or Property, Plant, & Equipment [PP&E]) and then depreciated over a period of years. In contrast to the private sector, government agencies tend to label any outlay, regardless of whether it is a long-term investment or a short-term expense, as an "expenditure."
2. "expense" - an expense is an expired cost. That is, it is used up during current operations. As such, it appears on the Income Statement. Except for non-cash expenses such as Depreciation Expense, Amortization Expense, and Allowance for Bad Debts, the vast majority of expenses go directly to the Income Statement (as a debit to Retained Earnings). I hope I didn't leave you glassy-eyed when I said that. ALL Income Statement accounts are subsets of Retained Earnings.
3. "cost" - as you might infer from the preceding definition, costs come in two flavors: expired (i.e., expense) and unexpired (asset). An expired cost (a.k.a. asset) is a cost that will generate revenues in a future period. Because of accounting's "matching principle" (http://www.businessdictionary.com/definition/matching-principle.html), costs are "matched" on the Income Statement with the revenues they helped generate during the period covered by the Income Statement. Unexpired costs become expenses in two ways: (a) cost of goods sold (COGS) - here costs carried as inventory are expensed in COGS to match the revenues the sale of the inventory generated; and (b) through use (e.g., direct expenses such as utilities) or through the passage of time (e.g., prepaid insurance, prepaid rent, etc.).
4. "charge" - in its most basic use, it is a debit (e.g., "Charge that account for $X."). Though that does not seem to be the context of your question, it's worth mentioning anyway. Otherwise, "charge" occurs most commonly under the label "Deferred Charge." A "Deferred Charge" appears on the balance sheet under the category "Other Assets." In contrast with prepaids such as rent and insurance, deferred charges are non-current assets that will be amortized over a long period of time, sometime five years or longer. Examples of deferred charges include Start-Up (or Organization) Costs) and Financing Costs (the direct costs of a borrowing transaction - bond underwriting costs, for example, or paying lawyers to prepare loan documents for a bank loan).
I hope these definitions are helpful. Please complete the 'rate-the-expert' email you'll get right after you get this reply. Your ratings help me do a better job of helping folks like you.
Take care, and feel free to write again if my explanations are not clear or you have other questions.
