Difference Between Liability vs Expense
Both liability vs expense results in the cash outflow of funds and are known to be of similar nature. But we often forget that there are some differences that are very important to understand and to interpret between liabilities vs expenses. Every business which is currently running and operational has liabilities and assets. Also, it has income expenses which is a part of the Income statement, and liabilities and assets are a part of a balance sheet. Liabilities and expenses are cash outflow in the business. An expense is always a liability to incur and when it gets incur it is shown as a cash outflow from the cash flow and gets accrued in the income statement. The expense is a subset of liability in simple terms. Expense until not paid off is a liability in nature.
Liability is an obligation of the business to pay during the course of time. Liability can be current or non-current in nature. Current liabilities are those which need to get paid in one year or less while non-current can extend more than one year. Generally, in the book of account items like Debt from financial institutions or borrowings extending more than a year comes under non-current liabilities. Liabilities are taken into the balance sheet of the company in order to create or expand for example financial debt in order to introduce a new product segment in the market or to make inorganic growth in the industry. The benefits of any liability can be shown only over the years and are not immediate.
Expenses, on the other hand, are all current and are incurred during a particular year. Expenses refer to day to day expenditure of the business and all the major expenses which fills the income statement of the firm. Expenses are generally recurring in nature for example staff cost, Rent, electricity etc. expenses are the cost to run the company which needs to be paid. Expenses affect the operational capacity of the firm where it becomes necessary for any business to pay their expenses on time in order to maintain their creditworthiness in the market and keep the business cycle churning.
Head To Head Comparison Between Liability vs Expense (Infographics)
Below is the top 9 difference between Liability vs Expense
Key Differences Between Liability vs Expense
Both Liabilities vs Expense are popular choices in the market; let us discuss some of the major Difference Between Liability vs Expense
- Expense is recurring in nature whereas liability may or may not be recurring in nature
- Liability may or may not be current in nature. There are non-current liabilities as well whereas expenses are mainly current in nature and need to be paid during a year or quarter’s time
- Liabilities are shown in the Balance sheet of the company whereas expenses are shown in the income statement of the company
- Liabilities of a company are shown as on date as a balance sheet of any company is prepared as on date whereas expenses are reflected during a particular period of time
- Liabilities are generally reduced whereas expenses are paid-off. For example, paying interest on the debt is an expense that is paid-off but paying back debt is not an expense it signifies a reduction of liabilities
- Expenses can be categorized as operational, capital or financial. Liabilities can also be categorized under similar heads but in the balance sheet, they are shown as current, non-current, secured, unsecured, contingent or current.
Liability vs Expense Comparison Table
Below is the 9 topmost comparison between Liability vs Expense
|
Liability |
Expense |
| Balance Sheet Item | Profit and Loss Account Item |
| Non-payment of liability leads to default especially when we are talking about non-current loans such as Bank debt, working capital or loans from financial institutions | Non-payment of expense leads to the creation of liability and can lead to misfunctioning of the company’s operations |
| Liabilities are accrued and then paid off | Expenses are generally paid off in real-time as it can affect the operations of the company |
| Liabilities are generally related and are matched with an asset in the balance sheet | Expenses are matched with revenues and as they reflected in the income statement of the company |
| Liabilities are generally incurred to generate an asset or to make a huge capital expenditure | Expenses are incurred to generate revenues of the company |
| Liabilities are incurred whereas the benefits of the liability will be reaped over the years in the company’s lifetime | An expense is incurred and the payments are made during that period only |
| Liability is basically for a future date and future payments are owed to the creditors. Liabilities in the balance sheet follows a payment cycle which is generally known as a credit cycle | An expense is basically a cost for operating a firm and keep the business of the firm running |
| Liabilities are not immediate in nature | Expenses are immediate in nature |
| Liabilities are non-cash in nature | Expenses can be a non-cash expense as well for example depreciation |
Conclusion
Both Liabilities vs Expense are a vital and important part of any business that wants to become an industry leader or manage its operations successfully. Both Liabilities vs Expense needs to be checked by the business on a periodic basis. A business should draft a clear plan and strategy for the future and how much they are projected to make CAPEX expenditure and incur expenses. Good business and company should do a thorough analysis that how much liability can the business take on its balance sheet. As there is no clear distinction between liabilities and expenses as they are often used interchangeably and are of a similar nature. But a good accountant should take into consideration which is a thin line of difference between Liability vs Expense.
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However, both should be seen in light of Profitability and Assets.
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