Expense Definition, Categories, and Examples

This is because, without you understanding your expenses, your business functioning would continue to remain incomplete. In fact, without incurring expenses, you would not be able to generate revenue from your business. Capital expenditures, commonly known as CapEx, are funds used by a company to acquire, upgrade, and maintain physical assets such as property, buildings, an industrial plant, technology, or equipment. Expenses are income statement accounts that are debited to an account, and the corresponding credit is booked to a contra asset or liability account. Cost of Goods Sold (COGS) is the cost of acquiring raw materials and turning them into finished products.

When a company accrues (accumulates) expenses, its portion of unpaid bills also accumulates. At the end of the year, Corey spends a total of $5,200 on deli meat and lists this as an expense on his income statement. One way to think about it is that expenses are negative income and positive income. Conversely, when income exceeds expenses, the company experiences a profit. Discover how to go from having a cash flow challenge to smart money management. The salary costs of the engineer and technicians is considered a revenue expenditure.

  • Deskera Books also comes with pre-configured tax codes, accounting rules, and charts of accounts.
  • When in doubt, please consult your lawyer tax, or compliance professional for counsel.
  • In both personal and corporate contexts, expense management contributes to financial stability and resilience.

Under the accrual method, the business accountant would record the carpet cleaning expense when the company receives the service. Expenses are generally recorded on an accrual basis, ensuring that they match up with the revenues reported in accounting periods. In the double-entry bookkeeping system, expenses are one of the five main groups where financial transactions are categorized. Other categories include the owner’s equity, assets, liabilities, and revenue. Expenses in double-entry bookkeeping are recorded as a debit to a specific expense account. A corresponding credit entry is made that will reduce an asset or increase a liability.

You incur expenses when your business spends money (e.g., when you purchase a good or service). For example, if you are paying too much rent on office space or buying supplies in bulk that are never used up before they expire, these costs will add up over time and hurt the bottom line of your company’s profits. An expense can also be an expenditure whose benefit is finished or enjoyed immediately or within the period of one accounting year. The dollar amount of the resources used up by the firm during a particular period of time in earning revenues. They are expenses related to borrowing money from creditors or lenders. Examples are the origination charges for loans and interest on borrowed funds.

An Example of Expenses and Its Accounting

Variable expenses are important for businesses to track because they can have a major impact on profits. Meaning businesses can become significantly more or less profitable with minor adjustments. Variable expenses are costs that change depending on the amount of revenue generated. As the company sells more products, the cost of goods sold increases. Expense accounts store information about different types of expenditures in an organization’s accounting records.

These are hence those expenses that are outside of your company’s core business line. Cost of Goods Sold (COGS) is the costs incurred while acquiring raw materials and then turning them into finished goods. COGS, however, does not include selling and administrative costs as incurred by your whole company, nor does it include interest expense or loss on extraordinary items. In accounting, costs are used in reference to and specifically for business assets, especially for depreciable assets. The cost of an asset includes each cost that was involved in the buying, delivering, and setting up of the asset.

This can include salaries, supplies, rent on office space or warehouse location, etc., and other necessary costs to keep everything running smoothly. However, it can result in a significant amount of waste if not properly managed. To avoid becoming wasteful or irresponsible with company funds, here are some good reasons to keep track of your business expenses. For companies that are responsible for external reporting, accrued expenses play a big part in wrapping up month-end, quarter-end, or fiscal year-end processes. A company usually does not book accrued expenses during the month; instead, accrued expenses are booked during the close period. A critical component to accrued expenses is reversing entries, journal entries that back out a transaction in a subsequent period.

Examples of COGS include direct material, direct costs, and production overhead. These examples are programmatically compiled from various online sources to illustrate current usage of the word ‘expense.’ Any opinions expressed in the examples do not represent those of Merriam-Webster or its editors. The articles and research support materials available on this site are educational and are not intended to be investment or tax advice.

What is a Taxable Expense?

You would have to break down your business’s expenses and revenue in your income statement. However, there are several nitty gritty to be understood when accounting for your expenses. Hence, expenses are those income statement accounts that are debited to an account, while a corresponding credit is booked to a contra asset or liability account. A summary of all such expenses is included in your income statement as deductions from the total revenue. Therefore, for a given period, revenue minus expenses will provide you with the net profit earned by you. The statement of cash flows is where the actual timing of cash payments for all expenditures will be reflected.


It allows for strategic decision-making, such as resource allocation, investment planning, and pricing strategies. Moreover, proper expense management ensures compliance with financial regulations and enhances transparency in financial reporting. Whilst there are a plethora of corporate finance and expense management apps, it is notable that Odoo and Expense.com.hk are free and simple to use. Other platforms, including Workstem and InfoTech requires an upfront payment plus relatively complex setup procedures.


For example, if a company spends money on advertising, this would be an expense. However, if they purchase new office furniture, this would be an expenditure. Period expenses are those that are incurred once and not on a monthly or yearly basis. An example would be an advertising campaign that runs for six months. The company would only pay again if they decide to purchase again at some point.

A second journal entry must then be prepared in the following period to reverse the entry. Accrual accounting measures a company’s performance and position by recognizing economic events regardless of when cash transactions occur, whereas cash accounting only records transactions when payment occurs. Accrual accounting presents a more accurate measure of a company’s transactions and events for each period. Cash basis accounting often results in the overstatement and understatement of income and account balances. Accrued expenses also may make it easier for companies to plan and strategize. Accrued expenses often yield more consistent financial results as companies can include recurring transactions in their financial reports that may not yet have been paid.

They consist of letting go of workers, selling property, or getting rid of a sizable asset. As a small business owner, it’s vital that you understand the importance of your expenses. It’s key that you keep track of your outgoing expenses to not overspend and put the financial health of your company at risk. By properly accounting for startups the ultimate startup accounting guide balancing your business income to your expenses, you can ensure that your business’s finances are well managed. It is important to note that not all expenditures are considered actual expenses in this case. Only those costs that are directly related to revenue generation are considered part of the expenses.

Expenses vs Capital Expenditures

CapEx is related to long-term spending – a major investment – while a revenue expenditure is related to short-term operating expenses. They are both recorded in the same financial year as they are incurred and cannot be forwarded to the next financial year. Expense – This is the amount that is recorded as an offset to revenues or income on a company’s income statement.

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