DIFFERENCE BETWEEN EXPENDITURE AND PAYMENT

Speed up your business with these expert tips on "The difference between spending and paying". Analyse and discover this TIP!

The difference between spending and paying is that expenditure refers to the consumption of goods and services in a given period, while payment refers to the delivery of money or means of payment in exchange for the goods and services purchased. In other words, expenditure is the financial outlay made when purchasing goods or services, regardless of whether payment is made immediately or left pending at a later point in time. Payment, on the other hand, is the actual delivery of money or the agreed means of payment to the supplier to settle the expenditure incurred. For example, if a company buys 1000 euros worth of materials in January, this amount would be considered as an expense for the month of January, even if the payment is made in February. The expense is booked in the month in which it is incurred, while the payment is booked at the time the funds transfer is made.

A practical example to differentiate between expenditure and payment is as follows

Let's imagine you own a clothing shop and you have bought a batch of T-shirts for your business. The cost of the T-shirts is $1000, and you choose to pay for them on 30 days credit.

• The spend is the amount of money you have committed to spend on the T-shirts. In this case, the spend is the $1000 you will have to pay for the T-shirts you bought.
• Payment is the moment when you actually disburse the money to pay off the debt acquired for the purchase of the T-shirts. In this case, the payment will be made in 30 days, when the credit period you agreed with the supplier expires.

Therefore, in this example, the expenditure is the purchase of the T-shirts for $1000, while the payment will be made 30 days later, when the money is actually disbursed to pay off the acquired debt. An expense is incurred when an obligation to pay an amount of money for the purchase of a product or service is generated. (according to the accrual principle). However, the payment, occurs at the moment we hand over this amount of money to our supplier, either in the bank account or in cash.

These two events do not have to occur on the same date, e.g. your company can make a purchase today and not pay for it for another 60 days:

• For accounting purposes, the purchase would be recorded today.
• The money will not leave the bank until the 60th day.
• This means that our PMP (Average Payment Period) is 60 days, i.e. the number of days that pass from the time we buy to the time we pay.

Case study for calculating cash flow taking into account expenditure and payment period

Of course! Here is a case study on how to calculate the cash flow taking into account the expenditure and the payment period:

Let us suppose that a service company has invoiced a total of 10,000 euros in the month of January. In addition, it has an expense of 5,000 euros corresponding to the purchase of materials. The supplier of these materials offers a payment period of 30 days. To calculate the cash flow, we must take into account that the expenditure does not necessarily coincide with the payment. In this case, the company has spent 5,000 euros in January, but has not yet paid, as the payment period is 30 days. Therefore, the expenditure is booked in January, but the payment will be made in February.

Thus, the cash flow for the month of January would be as follows:

• Income: 10,000 euros
• Expenses: 5,000 euros

Cash flow = Income - Expenditure = 10.000 euros - 5.000 euros = 5.000 euros

It is important to note that the expense must be accounted for in the month in which it is incurred, even if the payment is made in a later month. Thus, we can calculate the cash flow more accurately and get a better picture of the company's financial situation.