Question

Please explain the difference between an expense and a liability.

Answer 1

Sollution:- Difference Between an expense and a liability

1) A liability refers to a financial obligation, or upcoming duty to pay. An expense refers to money spent by the company, or a cost incurred by the company, in an effort to generate revenue for that company.

2) A company may have both a liability account and an expense account, but each serves a very different purpose.

3) A liability account is a type of accounting statement that itemizes how much the business owes to its creditors, or its debts. An expense account is an account that details the money advanced to a salesperson, officer of the company or other employee for food, lodging, client entertainment, travel and other expenditures necessary for the employee to make a sale or perform his job

4) Liability can be current or non-current in nature. Current liabilities are those which Needs to get paid in one year or less while non-current can extend more than one year.

5) 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.

6) An expense is basically a cost incurred by a business or money spent to earn revenue from the sale of its goods or services.

7) Liability is actually an outstanding amount owed by the business for a good or service it has received but has not yet paid for. A supplier may provide the goods or services now, but businesses pay for them at an agreed-upon later date.

8) A liability account and an expense account both appear within a company's financial statements, just not on the same statement. A liability account appears on a company's balance sheet. A balance sheet shows the financial standing of the company on a specific date. This date is usually the last date of an accounting period. It is based on the accounting equation: assets = liabilities + owner's equity.

9) An expense account appears on an income statement, which itemizes a company's revenues and expenses to determine its profit or loss over a specified period of time,either a month, quarter or year. It's based on the accounting equation: income = revenue - expenses.

10) Conclusion:- one of the main differences between liability and expense is the timing. One of the characteristics of liabilities is that it is either payable within one accounting year or more than one accounting period. The benefits of a liability are received in the current period, but it is due to be paid at a fixed date in the future. On the other hand, expenses are due to be paid as and when they are incurred, because the purpose of expenses is to earn revenue for the current period.