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Is an expense a liability?

Hi guys,

I am doing a business diploma via distance. I have a unit to do in Accounting but I didn't take Accounting at school. I am having trouble grasping the full concept of the various types of accounts, such as assets, liabilities, etc

Are liabilities and expenses the same thing? Are all expenses liabilities? I understand that liabilities are things that the business has to pay - so I assume that expense fall into this category as an expense is something the business has to pay.

Thanks for clearing this up for me!
Posted in Business & Commerce, asked by lefe, 5 years ago. 913 hits.

0

It can be easy to confuse expenses and liabilities as they can definitely be related. However, expenses and liabilities are not the same thing.

Let me give you a breakdown of each of the 5 types of accounts and their definitions:

Asset - objects owned by the business or resources over which the business can exercise control
Liability - amounts owed by the business to another party
Equity - value of the owners' shareholding in the business
Income/Revenue - amounts which flow to the business through operations or other services performed
Expenses - amounts incurred by the business for goods or services received from another party

The reason that expenses and liabilities can become blurred and confusing is that expenses can give rise to a liability, however this is not always the case.

There are two ways in which an expense arises, the transaction can either be settled immediately with cash or settlement can be delayed through the use of a loan or trading credit.

Consider the following two cases:

1.)
Office rent for the month of April 2013 paid on 31-March-2013 to the amount of $3,850.

Journal:
Rent Expense (dr) $3,850
Cash at Bank (cr) $3,850

2.)
Stationery to the value of $1,468 purchased from Office Wonders on credit over the term 2/10 net 30.

Journal:
Stationery Expense (dr) $1,468
Accounts Payable (cr) $1,468

Looking at the above two examples, you can see that an expense arises in both cases. The difference is that in the first instance, the expense is paid immediately, hence the effect on Cash at Bank. No liability is created. In the second case, the stationery is purchased on credit to be settled within 30 days. In this case, a liability is created and termed Accounts Payable.

Hope that clears things up for you!
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4 years ago
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