Expense: Definition, Types, and How Expenses Are Recorded

Discover how to go from having a cash flow challenge to smart money management. However, if expenses are cut too much it could also have a detrimental effect. For example, paying less on advertising reduces costs but also lowers the company’s visibility and ability to reach out to potential customers.

More important, however, is the chance to boost revenue by keeping expenses in check. Properly monitoring procurement promotes lower costs without compromising on sales figures. Regardless of industry, every business will have income and expenses to report, and effective reporting can make all the difference when it comes to retaining profit. More detailed definitions can be found in accounting textbooks or from an accounting professional.

As the operating expenses go up, the value of the assets go down. As a result, investors can use the ER to check on how much of a return they can expect from a fund. There are other types of business expenses of course, including employee travel, food costs, reimbursement, etc.

More from Merriam-Webster on expense

This is achieved by boosting revenues while keeping expenses in check. Slashing costs can help companies to make even more money from sales. An expense is an item requiring an outflow of money, or any form of fortune in general, to another person or group as payment for an item, service, or other category of costs.

  • The capital expenditure (CapEx) is essentially the maintenance cost for the equipment and property owned by the business.
  • The purchase is considered an asset on the income statement until it’s paid off, when it becomes an expense.
  • Within a business context, only expenses that relate to the cost of business operations should be included in the company’s records.
  • The purchase of an asset may be recorded as an expense if the amount paid is less than the capitalization limit used by a company.
  • There’s no reason not to take advantage of these digital tools for your expense management and reporting needs.

When in doubt, please consult your lawyer tax, or compliance professional for counsel. This article and related content is provided on an” as is” basis. Sage makes no representations or warranties of any kind, express or implied, about the completeness or accuracy of this article and related content. Track spending and submit or reimburse expense claims with Xero’s expense management tools. An expense is a payment made in the form of cash or other resources such as time. Common expenses are the cost of goods sold, rent expense, wages expense, and utilities expense.

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To qualify as a trade or business activity, it must be continuous and regular, and profit must be the primary motive. Even if something qualifies as an expense, it is not necessarily deductible. The IRS treats capital expenditures differently for tax purposes according to the Internal Revenue Code, so financial departments usually write them off slowly over time. The schedule for capitalizing on CapEx is different from that of other business expenses.

what is a expense

Expenses are essentially any cost a business incurs in order to generate revenue. For example, a business may pay for electricity quarterly, and receive the bill at the end of each quarter. Although the period covers several months, the amount is only entered into the record at the end of each quarter when the bill is paid. The IRS has a schedule that dictates the portion of a capital asset a business may write off each year until the entire expense is claimed. The number of years over which a business writes off a capital expense varies based on the type of asset. Please include what you were doing when this page came up and the Cloudflare Ray ID found at the bottom of this page.

Bookkeeping for expenses

Yes, salary is considered an expense and is reported as such on a company’s income statement. Non-operating expenses are separate from operating expenses from an accounting perspective so as to be able to determine how much a company earns from its core activities. Naturally, expense reports are filed by employees so that they may be reimbursed for certain purchases later. The company must check whether all the items on the report are eligible for reimbursement before following through with the payment.

what is a expense

In reality, not all expenses are carefully considered by the accounting department and filed through formal paperwork. Sometimes, a business purchase must be made out “on the field,” such as when an employee on a business trip buys a meal between meetings. Finally, expense management is key to employee reimbursement for those transactions. Through efficient paperwork and data processing, financial teams are able to approve and issue payments back to employees promptly.


Budgets and historical trend analysis are expense management tools. The purchase of an asset may be recorded as an expense if the amount paid is less than the capitalization limit used by a company. If the amount paid had been higher than the capitalization limit, then it instead would have been recorded as an asset and charged to expense at a later date, when the asset was consumed. Operating expenses are the expenses related to the company’s main activities, such as the cost of goods sold, administrative fees, office supplies, direct labor, and rent. These are the expenses that are incurred from normal, day-to-day activities.

Examples of expenses include rent, utilities, wages, salaries, maintenance, depreciation, insurance, and the cost of goods sold. Expenses are usually recurring payments needed to operate a business. The IRS treats capital expenses differently than most other business expenses. While most costs of doing business can be expensed or written off against business income the year they are incurred, capital expenses must be capitalized or written off slowly over time. One of the main goals of company management teams is to maximize profits.

The former are the expenses directly related to operating the company, and the latter is indirectly related. Accountants must review the expenses every financial period so that the company stays within budget and no excessive spending takes place. At the same time, they must make sure any spending cuts don’t result in unwanted reductions in operational efficiency or the quality of the products and services produced. Also known as the management expense ratio (MER), the Expense Ratio shows us what portion of a fund goes into administrative expenses. It’s calculated by dividing the fund’s operating expenses by the value of its assets.

In accounting, an expense refers to any cost that contributes to a company’s overall cost of doing business. That is, any costs incurred as a result of a company’s attempted or successful revenue production. An expense is a cost that businesses incur in running their operations. Expenses include wages, salaries, maintenance, rent, and depreciation. Businesses are allowed to deduct certain expenses from taxes to help alleviate the tax burden and bulk up profits.

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 ER can come in several variations, such as the net expense ratio, the after reimbursement expense ratio, and others. Get in touch with your financial department if you want to know more about the ER. A manufacturing plant will naturally have more direct purchases, whereas a software service provider would probably spend nearly exclusively on indirect transactions. It doesn’t take an expert to understand that you have to spend money to make money.

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for today’s business reality. Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years. He is the sole author of all the materials on AccountingCoach.com.

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Typical business expenses include salaries, utilities, depreciation of capital assets, and interest expense for loans. The purchase of a capital asset such as a building or equipment is not an expense. For example, if a business owner schedules a carpet cleaner to clean the carpets in the office, a company using the cash basis records the expense when it pays the invoice. 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.

However, they will record the expense for internet service for the month the cost was incurred, even though payment was made the following month under accrual accounting. Expenses are recorded on the debit side of an expense account (which is an income statement account) and a credit is recorded to either a liability or an asset account in accordance with double-entry bookkeeping. Technically speaking, an expense is incurred whenever an asset is used up or a liability is incurred. With regards to the accounting equation, expenses effectively reduce a business owner’s equity. Expense management is the concept of reviewing expenses to determine which ones can be safely reduced or eliminated without having an offsetting negative impact on revenues or on the development of future products or services.