In daily interactions, people often use the terms cash outflow and expense interchangeably. While they have similar meanings, they often have varying implications. Accountants differentiate between the two, so you may see references to cash outflows and expenses in financial statements that relate to different figures.
The term expense is a general term that refers to a company's financial obligations to other parties. The company may incur expenses when it borrows funds from financial institutions or investors, when it buys products or services from other parties and when taxes become due. The company may or may not have satisfied these obligations. Depending on the company's accounting method, it may recognize an expense at the time the company incurs the expense or at the time of payment.
Cash outflows refer to those expenses for which the company has made cash payment. For example, assume a business buys a piece of machinery on credit on the 1st of the month and only makes cash payment for it on the 15th of the month. The business would incur the expense on the 1st of the month, but the cash outflow would only occur on the 15th of the month.
A business also has expenses that don't involve cash outflows. These include depreciation and amortization, both of which relate to long-term assets of the business. Because these assets remain useful for more than one year, the business has to recognize the expense over more than one year as well. For example, if a farm buys a tractor for $50,000 cash, the farm would have a cash outflow of $50,000 at purchase. If the tractor has a useful life of five years, the farm would recognize $10,000 of the expense each year for five years.
Expenses and cash outflows appear in different financial statements. In the income statement, also known as the profit-and-loss statement, a business lists its revenues and expenses. These expenses include both cash and non-cash expenses. To find the company's cash outflows, look at its cash flow statement. The cash flow statement shows the business' cash inflows and outflows over a period of time, regardless of when the company recognizes the revenues and expenses.
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