What is the difference between expenses and liabilities

This Accounting Basics tutorial discusses the five account types in the Chart of Accounts. We define each account type, discuss its unique characteristics, and provide examples. Having a good understanding of the account types is necessary for anyone creating accounts, posting transactions and journal entries, or reading financial reports.

We briefly define each account type below. Assets can be defined as objects or entities, whether tangible or intangible, that the company owns that have economic value. Tangible assets are physical entities that the business owns such as land, buildings, vehicles, equipment, and inventory. While Intangible assets are things that represent money or value, e. Accounts Receivables, patents, contracts, and certificates of deposit CDs.

Assets are also grouped according to either their life span or liquidity - the speed at which they can be converted into cash. Current assets are items that are completely consumed, sold, or converted into cash in 12 months or less. Examples of current assets include accounts receivable and prepaid expenses. Fixed assets are tangible assets with a life span of at least one year and usually longer.

Fixed assets might include machinery, buildings, and vehicles. Fixed assets are typically not very liquid. Because of their higher costs and longevity, assets are not expensed, but depreciated , or "written off" over a number of years according to one of several depreciation schedules. Liabilities are the debts, or financial obligations of a business - the money the business owes to others.

Liabilities are classified as current or long-term. Current liabilities are debts that are paid in 12 months or less, and consist mainly of monthly operating debts. Examples of current liabilities may include accounts payable and customer deposits. Current liabilities are usually paid with current assets; i. A company's working capital is the difference between its current assets and current liabilities.

Liabilities vs Expenses. Expenses and liabilities both represent an outflow of funds either to be incurred in the current period as an expense, or to be settled on a future date, in the case of a liability. Long term liabilities are owed by a firm for more than one year, and short term liabilities are for less than one year. Examples for liabilities include payments to be made to creditors, bank over drafts, accrued rent, accrued electricity, and other amounts that are owed by the firm.

Liabilities will help a firm obtain benefits now for which payment will be made in the future, and this will allow a firm to expand and continue business activities even if they cannot pay for it currently. It is vital for a company to keep its liabilities under control, and maintain sufficient assets to cover the amount of liabilities so that in the event of liquidation the firm will have enough assets to pay off their obligations. Expenses are the costs that businesses incur in the day to day business activities.

Both paid and payable payroll expenses will be shown as expense in income statement. Payroll Liabilities If on the due date of salary payment, company does not pay, it will become the liability to pay the salary. So, showing this liability, we make balance sheet. In balance sheet, payroll liabilities will show as current liabilities because if this year, we do not pay, it is sure, next year, we will pay all payroll liabilities.

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