Loss Vs Expense

Loss – is the excess of expenditure incurred over revenue earned by a business for a given accounting period. It reduces the total capital invested in the business.

Such monetary damage may arise due to;

• Business operations – Relating to business activities.
• Non-recurring events – Relating to unforeseen events e.g. fire, theft, loss on sale of fixed assets, etc.
• Accounting loss – Relating to accounting policy or accounting standard changes, etc.

Loss Shown in Financial Statements

Net Loss incurred by a business is shown on the credit side of an income statement as a balancing figure. At the time of preparation of final accounts, the loss is transferred to the balance sheet.

Expense – Money spent by a firm for generating revenue is termed as expenditure or expenses. The cost incurred as expense usually expires during the same accounting period, i.e. it is not carried forward to a future period.

Expenses may occur in the following forms;

1. Cash payment of currency, for e.g. paying bills such as rent, salaries, etc.
2. A decline in the value of assets (e.g revaluation loss or investment loss), etc.
3. Accepting a liability, for example – accrual of rent, etc.
4. The total cost of goods sold.
5. Depreciation & Amortization.
6. Bad debts, etc.

Expenses are classified in various different ways;

• Direct or Indirect Expense – Based on the relationship with the core business.
• Capital or Operating Expense – Based on the type of expenditure.
• Petty or Sundry Expenses – Based on the size, quantity & relevance.

Expense Shown in Financial Statements

Expenses incurred by a business are shown on the debit side of an income statement and are further used to compute the net gain or net loss of the company.

One of the main differences between loss and expense is that total loss is computed with the help of total expenses and affects the total capital invested in the business. On the other hand, expenses do not directly affect the capital invested in a business.

Difference Between Loss and Expense (Table)

Cost Vs Expense Vs Loss

Meaning of cost: Cost is the monetary measure of the resources that a business has used or spent in the primary process of producing its sources of revenue i.e. goods or services.

• Cost may also represent the resources utilized in acquiring assets for the business, as that will result in future benefits.
• Cost does not include the profit margin. It can be divided into categories like direct-indirect, implicit-explicit, etc.

Loss vs Cost – Loss can not be used interchangeably with cost, in any accounting sense. Loss necessarily means an outflow of funds, an unfavourable monetary condition that results from some incidental transaction and not the primary activities of a business. Loss does not give rise to any economic benefit. On the other hand, the cost incurred will represent resources used in order to earn revenue from it.

Expense vs Cost – Expense and cost are closely related terms but there are few points of distinction between the two.

• The similarity between them is that both the expense and cost represent the use of resources owned by a business in relation to some revenue. Both of them relate to the primary money-earning operations of a business.
• But, the expense necessarily inhibits resources that have already been used and the economic benefits have been realized. If not, that particular expense shall not be a part of the income statement.
• Costs can be both utilized and deferred. Cost is more of a sacrifice to let go of one thing in order to own something else.
• If the economic benefit deriving from the cost has been realized in the financial year, it will be expensed and shown on the income statement. Else, it will be a deferred cost and shown on the balance sheet.

Read Difference Between Income and Revenue

Sales Book Vs Sales Account

Sales Book – It is a subsidiary book of accounting used to record all goods sold on credit. One of the major differences between sales book and sales account is that only the items sold on credit are recorded in the sales book, whereas the same is not applicable to a sales account as it takes into account both cash and credit sales.

Sales Account – It is a ledger account just like any other account in a business. It is a part of the chart of accounts and it is used to record the journal entry for cash and credit Sales. It includes all sales and returns-related transactions which help a business determine the net sales for a given accounting period.

Difference between Sales book and Sales account – Table Format

Related Topic – Difference Between Purchase Book and Purchase Account

Sample Format of Sales Book and Sales Account

Sales Book

Sales Account

>Read Difference Between Financial Accounting and Management Accounting

Purchase Book vs Purchase Account

Purchase Book – It is a subsidiary book of accounting used to record all goods purchased on credit. One of the major difference between purchase book and purchase account is that only the items purchased related to the core business operations are recorded in the purchase book, whereas the same is not applicable to a purchase account. All capital expenditure is excluded from the purchase book.

Purchase Account – It is a ledger account just like any other account in business. It is a part of the chart of accounts and it is used to record the journal entry for cash and credit purchases. It includes all stock related transactions which help a business to ascertain the amount of inventory available at any time.

Difference between purchase book and purchase account – Table Format

Related Topic – Difference between Sales Book and Sales Account

Sample Format of Purchase Book and Purchase Account

Purchase Book

Purchase Account

>Read Difference Between Debtors and Creditors

Debtors vs Creditors

While purchasing goods on credit a buyer may not make the payment immediately instead both the seller and buyer may enter into a lending & borrowing arrangement. This allows delayed payments for current invoices. Even though payment terms are mutually agreed upon there is still a difference between debtors and creditors.

Typically such agreements involve a short interest-free credit period during which the buyer can make its payment. Debtors and creditors may be defined as follows;

Debtors – A person or a legal body that owes money to a business is generally referred to as a debtor in the eyes of that business, as he or she owes the money. For a business, the amount to be received is usually a result of a loan provided, goods sold on credit, etc.

Example – Unreal corp. purchased 1000 kg of cotton for 100/kg from X to use as raw material for their clothes manufacturing business. The total invoice amount of 100,000 was not paid by Unreal corp. In this example, Unreal corp. is a debtor for X.

Creditors – In day-to-day business, a person or a legal body to whom money is owed is known as a creditor. For a business, the amount to be paid may arise due to repayment of a loan, goods purchased on credit, etc.

Example – Unreal corp. purchased 1000 kg of cotton for 100/kg from vendor X. The total invoice amount of 100,000 was not received immediately by X. In this example, X is a creditor for Unreal corp.

Difference Between Debtors and Creditors (Table Format)

Shown in Financial Statements

Debtors and Creditors are both critical financial indicators and important parts of the financial statements of a company. Debtors form part of the current assets while creditors are shown under the current liabilities.

In the balance sheet

Vendor and Supplier

Is the supplier a creditor or debtor?

A supplier is usually the first link in a supply chain. It does not indulge in the inventorying processes and provides goods that are further processed in the supply chain. The concept of supplier is more commonly found in B2B chains.

Going by common practice, a supplier will be a creditor of the company. Assuming that the business is buying its raw material from a supplier on a regular basis, and then adding some value to them and manufacturing a finished product for the market.

Example: A restaurant owner X is buying vegetables from a farm owner and making dishes for customers. There is a value addition to the vegetables in this case. Also, the farm owner is most likely not selling these vegetables to retail consumers and just supplying them to various restaurants.

Is a vendor a creditor or a debtor?

A vendor is usually the last link in a supply chain. A vendor involves in the process of buying from one company and selling to the other. It can be both B2B and B2C kind of the supply chain. It generally does not involve manufacturing or value-adding processes

Usually, a vendor can be both a debtor and a creditor of the business. Since a vendor may be providing the company with some kind of finished products and also can be buying the same products from another company.

Example: The same restaurant owner X may not want to indulge in ice cream making and is just buying desserts from a vendor on a regular basis, making him a creditor for X. On the other hand, the same vendor may be buying these desserts from a dairy business B, making him a debtor for B. There is no value being added other than packing and shipping in this case and there is inventorying involved.

Is Debtor and Creditor Asset or Liability?

An asset is something that inhibits future benefits. These are economic resources that are owned by the business and can be measured in monetary terms. Going by this definition, a debtor is an asset to the business.

• Since a debtor represents a financial obligation for the entity to repay in the future, putting the business on the receiving end.
• Debtors owe cash benefits to the business and hence are classified as current assets in the balance sheet.

On the other hand, liabilities are the amounts that a business entity has to pay. Liabilities can be both internal and external. By this definition, creditors are an external liability for the business.

• Creditors inhibit future cash outflow for any business. This amount reduces with payments to the entities that the business owes money.
• Creditors are classified as current liabilities on the balance sheet.

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What is the Difference Between Current Assets and Liquid Assets?

Current Assets and Liquid Assets are both used to assess a company’s cash position and are also applied in the process of ratio analysis to compare with other related variables. They are similar, however, there is a slight difference between current assets and liquid assets.

Both current assets and liquid assets help determine the overall short-term financial situation and the ability of a company to repay its short-term commitments.

Current Assets

These are short-term assets owned and held by a company for 12 months (maybe less) or for a single accounting year. The intentions are to convert current assets into cash within a short period of time or to utilize them to pay off other current liabilities.

Examples of current assets include cash in hand, cash at bank, sundry debtors, short-term investments, bills receivable, inventory, prepaid expenses, etc.

• Current assets are shown separately as a line item in the financial statements.
• They include prepaid expenses and inventories.
• Current assets are used to calculate the current ratio of a business.
• In theory, they are liquid but practically current assets are not as easily convertible to cash as compared to liquid assets.
• Current assets are also known as circulating assets, circulating capital and floating assets.

Related Article – What is Super Quick Ratio?

Liquid Assets

are short-term assets which are considered highly liquid in nature. They are cash, cash equivalents and any other assets which can practically be turned into cash in just a few days.

Quick assets are calculated as;

Current Assets – (Inventory + Prepaid Expenses)

Inventory and prepaid expenses are excluded from liquid assets as they can not be converted into cash within a few days of time.

• Liquid assets are not shown separately in the financial statements.
• They do not include prepaid expenses and inventories.
• Liquid assets are used to calculate the liquidity or quick ratio of a firm.
• In theory and practically liquid assets are more liquid and quickly convertible to cash as compared to current assets.
• Liquid assets are also known as quick assets.

>Related Long Quiz for Practice Quiz 20 – Current Assets

>Related Long Quiz for Practice Quiz 27 – Liquid Assets

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