In a business environment, expenses are the outflow of money required to acquire a resource or avail of a service. They are the cost of generating revenue for the business and their incurrence is, thus, inevitable. Expenses are incurred at each and every stage of business – right from pre-set-up stage, to actual set up to day-to-day operations and expansion plans.
It is crucial for commercial entities that they properly manage and control their business expenses. Poor management and insufficient control over business expenses generally translate into insufficient profit or even a loss for the entity. Business entities often bifurcate their expenses into several categories so that they can be managed and controlled in a better way.
This article looks at meaning of and differences between two categorization of expenses based on the frequency of their incurrence – recurring and non-recurring expenses.
Definitions and meanings
Recurring expenses are those expenses that are incurred as part of regular, routine and ongoing business operations of the entity. To ensure continued business operations, these expenses are therefore incurred frequently on a periodic basis.
Recurring expenses include a wide range of expenses, such as:
- Expenses required for day-to-day office work such as consultant retainer costs, ERP subscriptions, office electricity, communication expenses and staff salaries etc.
- Expenses required for property maintenance such as rent of factory and office, maintenance charges, depreciation and housekeeping costs etc.
- Expenses needed for product marketing and advertising activities such as marketing agency fees and advertisement costs etc.
- Expenses required for sales and distribution of goods like transporters’ payments and distributors commission etc.
Recurring expenses are fairly predictable as they are incurred as per pre-determined schedule, making them amenable to estimation. They are, thus considered while preparing and implementing entities’ expense budgets.
Non-recurring expenses are those expenses which do not arise out of routine, day to day business operations but instead are attributable to one-off or extraordinary events. Non-recurring expenses are thus infrequent in nature and not expected to be repetitive.
Non-recurring expenses can be incurred due to several reasons which may include:
- Extraordinary events: costs incurred due to labor strike, losses on account of natural calamities, restructuring costs and civil suit costs
- Changes in accounting principal: impairment losses, book adjustments to align with new accounting rules
- Shutting down or starting up a department or a certain operation: closure expenses, expansion costs like investment in a new facility and equipment etc.
The exact nature of these expenses will determine whether they qualify as revenue or capital. In either case, these expenses tend to be significant and impact both profitability and cash flow. They are, thus, carved out and reported separately to draw management and stakeholders’ attention.
Differences between recurring and non-recurring expenses
The nine key points of difference between recurring and non-recurring expenses have been listed below:
- Recurring expenses are expenses incurred on account of regular, day to day business operations and are thus incurred periodically.
- Non-recurring expenses are expenses that are not incurred frequently and occur due to extraordinary or one-off circumstances.
- Recurring expenses are incurred frequently and on a periodic basis. For example, rent and electricity bill are mandatorily incurred each month.
- Non-recurring expenses are not repetitive in nature and may often incur only once. For example, loss of stock due to flood, fire or earthquake etc.
- Recurring expenses are incurred on account of routine business causes i.e., to facilitate day to day business operations.
- Non-recurring expenses can be incurred due to business or non-business causes. For example, expenses incurred on expansion of manufacturing facility are due to business causes whereas losses incurred on account of natural calamities are due to non-business causes.
4. Revenue or capital nature
- Recurring expenses, being repetitive in each period, are generally revenue in nature i.e., the benefit of these expenses arises within a single business cycle or accounting period.
- Non-recurring expenses may be revenue or capital in nature. For example, equipment costs on account of facility expansion are capital in nature whereas losses incurred due to trade strike could be revenue in nature.
5. Estimation and provisioning
- Recurring expenses are generally pre-determined; thus, they can be reasonably estimated and are often provided for periodically. These expenses also form part of an entity’s expense budgeting.
- Non-recurring expenses, on the other hand, are less predictable and, thus, may not be able to be anticipated or estimated in advance.
- The predictable nature of recurring expenses also makes them amenable to cost control policies.
- Due to the unpredictable nature of non-recurring expenses, they are less manageable through cost control policies.
7. Financial accounting and reporting
- Recurring expenses are categorized into expense heads and reported in either the trading or profit and loss account depending on their nature.
- Non-recurring expenses may either be capitalized or expensed in the profit and loss account depending on whether they are capital or revenue in nature. In most cases, attention to the incurrence of these expenses is drawn by way of a specific accounting note in the financial statements.
8. Cost accounting
- Recurring expenses generally get allocated as overheads to product cost.
- Since they are one-off and typically high quantum expenses, non-recurring expenses generally do not form part of product cost.
- Examples of recurring expenses include periodic utility expenses, routine sales and marketing expenses and depreciation expenses etc.
- Examples of non-recurring expenses include restructuring costs, expansion costs, losses due to natural disasters or other unforeseen expenses and large civil suit costs etc.
Both recurring and non-recurring expenses impact the cashflow as well as profitability of a business entity. Since recurring expenses impact profitability year-on-year, they must be analyzed, monitored and controlled to ensure that they are within the budgeted amounts.
Although non-recurring expenses are generally not budgeted for, they may have an even more stringent impact on cash flow or profitability of the year in which they are incurred. Non-recurring expenses like new premises or new equipment costs are positive in nature because they help enhance business operations. Some non-recurring expenses like large legal expenses, costs of discontinuing operations and expenses related to labor unrest etc. can create losses for business and thus their causes ought to be investigated and corrected.