What is Total Expenditure?
Total expenditure is a word used in economics to indicate the total amount of money spent on a product during a certain time period. This number is calculated by multiplying the quantity of a product purchased by its purchasing price.
The manner in which total expenditures fluctuate over time is determined by price changes over that period. Demand elasticity is directly connected to the degree to which a price change impacts the amount spent on a product.
Economists are continuously searching for methods to quantify the link between the price levels of a product and the associated customer behavior. It is not as easy as reducing the price of a product in order to increase sales.
Demand levels are also crucial in establishing at what price point the product will receive the best reaction. The total amount spent on a thing is always proportional to its price and demand.
Before calculating the overall cost of a product at a given moment, it is necessary to know both the quantity and price at which the product was sold.
Consider a corporation that sells vehicles and sets the price of a single vehicle at $20,000 US Dollars (USD). In a certain time period, the firm sells 200 automobiles at that price. In this scenario, the total expenditures would equal 20 times $20,000 USD, or $400,000 USD.
Obviously, the number of automobiles sold was not only dictated by the price level at the time. When assessing overall spending, it is essential to additionally consider the demand for that automobile or any other commodity and how that influences the quantity sold.
When analyzing expenditures, economists pay special attention to the elasticity of demand. The elasticity of demand quantifies how adaptable the level of demand for a certain product may be.
In the case of total expenditure, different levels of demand elasticity might produce three distinct outcomes. If a product’s demand is relatively elastic, spending levels will shift in the opposite direction of any price change. When expenditures are generally inelastic, they should move in the same direction as price increases.
When demand reaches a threshold known as unit elastic, any price adjustment will have no influence on the amount spent on a product.
Expenditure vs Expense
It is essential to differentiate between a spend and an expense. Although they are linked, they are distinct and have crucial distinctions you must understand.
Expenditure is the entire amount paid for a product or service. For instance, a corporation purchases a $10 million piece of equipment with an estimated 5-year useful life. This would be considered a capital expenditure of $10 million.
This is the amount recorded as a reduction to revenues or income on the income statement of a business. For instance, the identical $10 million piece of equipment with a 5-year useful life incurs annual depreciation costs of $2 million.
Types of Expenditures in Accounting
In accounting, expenditures are divided into two basic categories: capital expenditures and revenue expenditures.
1. Capital Expenditure
When a corporation purchases an asset with a useful life of more than one year, it incurs a capital expenditure (CapEx) (a non-current asset).
In many instances, it may include a substantial corporate growth or the acquisition of a new asset with the intention of producing more long-term revenues.
Therefore, such an asset requires a considerable initial investment and ongoing maintenance to be fully operational. Consequently, many businesses fund their projects using either debt financing or equity financing.
Because the investment is a capital expenditure, the firm will reap the advantages over a number of years. As a result, it cannot deduct the asset’s entire cost in the same fiscal year. Therefore, it distributes these deductions across the asset’s useful life.
This asset’s value will be shown on the balance sheet, under noncurrent assets, as part of property, plant, and equipment (PP&E).
2. Revenue Expenditure
A revenue expenditure happens when a business invests money on a temporary advantage (i.e., less than one year).
Typically, these costs are utilized to sustain continuous operations; when expensed, they are known as operational expenses. Income is not affected until the spending is reported as an expense.
A delayed revenue expenditure, or deferred expense, is a payment made in advance for products or services. This is a sort of prepayment for costs. Typically, the contract stipulates that the corporation will receive products or services in the future, but will pay for them in advance.
As a result, the corporation regards the transaction as an asset until it realizes all of the purchase’s advantages. In the firm’s financial records, the agreement has no effect on profitability because the company has not yet acquired the asset and has not yet reaped its advantages.
The result of the transaction is credited to the profit or loss account over a specified time period.
The term ‘total expenditure’ was first introduced by American economist Arthur Burns as a measure of the full amount an economy has spent on its total production.
As we understand that economy is not in perfect condition and is bound to go through certain ups and downs. Therefore, the term ‘total expenditure’ should be measured not only in terms of GDP (gross domestic product), but also in terms of other economic parameters like inflation, unemployment rate, etc.