Liabilities are typically classified into: The obligations like these become liabilities for the purpose of entity’s financial statements. Similarly, when an entity borrows money from a lender, it is obligated to pay interest on the loan as well as repay the principal amount of loan. When an entity purchases any goods or avails any services, it is obligated to compensate the seller usually by way of a monetary payment. (Being salaries and rent for the month accounted and paid via check)Ī liability is a financial obligation of an entity that has arisen as a result of its past business transaction. These qualify as expenses and the entry accounted for is: Additionally, he also pays an office rent of $500 on monthly basis. During this process, he has hired two lawyers to assist him in all of his paperwork. A is engaged in the business of providing legal services to corporate clients. Finance expenses: Expenses incurred to meet funding requirements primarily loan processing fees and interest on loansĮxpenses are accounted for by charging them to trading or profit and loss account with a credit to some payable account (rent payable, salary payable, interest payable etc.) in case of accruals and bank account in case of cash expenses.Administrative expenses: Expenses incurred in day to day routine operations such as printing and stationery, office electricity, telephone and internet expenses etc.Selling and distribution expenses: Expenses incurred in the process of selling goods such as transport costs, handling costs, packaging costs, warehouse costs, advertising costs etc.Manufacturing expenses: Expenses incurred in the manufacturing process such as direct materials, worker wages, power and oil, supervisor salaries, factory rent etc.These payments qualify as business expenses.Įxpenses incurred in business can be broadly categorized based on the stage of the business at which they are incurred: For example, a manufacturing entity would be required to pay rent to the owner of its factory building and wages to its workers so as to carry on its production activities. In the course of their revenue generating activities, business entities would acquire some goods or utilize some services and the monetary outflow expended on them are the expenses of the entity. Definitions and meanings Expense:Īn expense is a cost that must be incurred by an entity so as to generate business revenue. The article “ expense vs liability” looks at meaning of and differences between two of these components – expense and liability. Revenues and assets are represented by current or future inflows whereas expenses and liabilities by current or future outflows. Accounts recorded in these financial statements fall in either of the four categories i.e., revenue or expense and assets or liabilities. The financial statements of a business which report its profitability and financial position primarily consist of a profit and loss account and a balance sheet.
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