Liability Vs. Expense

A credit card payment, is it a liability or an expenditure as of today, when I swipe the card?, or on the day then the bill (shockingly big) arrives at our door step. For the record, it becomes a liability today, but does not become an expenditure, till the day the bill arrives. After that it becomes an expenditure. Thus the line of difference is quite faint, yet the difference in itself is substantial. Here are the definitions of the two concepts.

Definition

There are no officially stated definitions of an expenditure and a liability. Both concepts are basically common connotations and are understood as per the time frame. Here are the common explanations:

• An expenditure is basically any situation where money becomes payable with immediate effect. However at the same time, it is not necessary that the money is to be paid immediately. Citing the above example, the time frame of an expenditure is such that a liability does not become an expenditure till the last date of filling the bill. On the whole, when the recipient of the money wants it immediately or does not want to extend the timeline of the transaction, it is said to be an expenditure. An expense is usually accrued or instantly incurred.
• A liability on the other hand does not tend to be an expenditure. Money owed to a person but not payable with immediate effect is said to be liability. A liability is not payable immediately, but is still payable at a future date. Again citing the aforementioned example, a liability is the point of time when we swap the credit card, the money remains payable, but not with immediate effect. A liability is always accrued and it becomes payable at some point of time. A liability is posted to the left hand side of any said balance sheet.

Coincidentally, there are three effects or rather permutation or combinations of expenses and liabilities, which tend to cause confusions, accountants define these effects as:

• An unpaid expenditure is a liability
• An expenditure which is yet to occur is a liability
• Thus every expenditure in itself is a liability and every liability in itself is an expenditure.

There are, of course, several exceptions to the aforementioned rule of thumb.

Differences in Liability and Expense

Here's a small explanation on the comparison between liability vs. expense, enlisting differences which are commonly observed.

• A liability can be an expenditure at first, that is the time when a certain expenditure goes unpaid and is also not claimed. For example, a company fails to pay a said employee his or her salary. If unclaimed, this salary remains to be a liability. The moment it is claimed by the employee, becomes an expenditure. Some common examples of such a category of liability include, all unpaid expenditures, unpaid taxes and unpaid considerations.
• In some cases, liabilities tend to be expenditures. This includes, all bills such as credit card bills. It basically means that we use the services as of now, and pay for them later on. A bill usually arrives in the first week of the month. The bill paid in such a situation is for the services used in the previous months. In such a case, the usage of services creates a month-long liability which becomes payable on the day when the bill arrives, that is, it becomes an expenditure.
• Thirdly, there are some liabilities that are not expenditure based. For example, the investments by share holders or a secured loan. Such liabilities are always direct liabilities, that is, they never take the form of an expenditure. This case is best observed for the share holder's liabilities. This liability never turns into an expenditure and even when the company is being wound up the capital is simply repaid. Dividends and bonus issues are not expenditures and are simply, methods of profit-sharing.
• In case of loans, it must be noted that the interest, fees and Annual Percentage Rate (APR), is the actual expenditure, the total principal amount that has been borrowed is merely a borrowed about and technically a liability.

Often expenditures are categorized as operational, capital and financial. Similarly, liabilities can also be classified into operational, capital and financial, however in a balance sheet, such liabilities are classified into capital, secured, unsecured, current and contingent.