Expenses are those values from which the benefits have been already taken. Expenses reduce the value of the assets. In accounting expenses are recorded as an expense if the benefit has been already taken, it does not matter whether the payment has been done or not. Expenses are spent of money or cost used by a business in order to produce or generate profit/benefit for the business.
Examples of expenses:
- Rent expense
- Employer’s salary
- Purchased goods
Types of expenses
- Cost of goods sold (COGS)
- Operating expenses – selling/general & admin
- Financial expense
- Extra-ordinary expenses
- Non-operating expenses
Cost Of Goods Sold (COGS)
Cost of goods sold is the cost paid for raw material and converted them into a final product. It does not include any other cost incurred by the whole company such as the cost of selling, administrative cost, etc.
- For manufacturing firms, it includes direct labor, direct materials, production overhead.
- For a service company, it is called cost of service instead of COGS.
- For a selling company, it is called cost of sales.
Operating Expenses – Selling/General & Admin
Operating expenses are those expenses which occur as a result of selling goods and services such as shop rent, sales salaries, etc. General expenses are those which occur when running the core line of the business such as travel expense, training expense.
Financial expenses are those expenses which are occurred in owning an asset or property.
This is expenses which are of outside the firm’s business regular activities.
Example of Extra-Ordinary Expenses: selling land, etc.
Non-operating expenses are quite different from the operating expense as they are not related to the day-to-day business activities as they occur outside the company.
Example of non-operating Expense: you have taken a loan from a bank & bank loans include interest. The interest you have paid to the bank for borrowing money is called non-operating expense.
Characteristics of Expenses in accounting
- Expenses are very crucial to manage the day-to-day operations of a company.
- They are important in generating profit for the business. It means money spent by the company on something which can generate financial profit in the future.
- Expenses reduce equity by reducing the net income or profit of the business.
- Expenses should be recorded accurately in the books of account to know the origin of the expenses. It makes easy to measure the number of expenses.
Synonyms of Expenses
- In terms of money paid-out: expenditure, cost, price, charge, fee, payment, value, amount, risk, capital, rate, custom, duty, excise, tax, investment, interest, payroll.
- In terms of thing responsible for causing money to be paid-out: responsibility, obligation, loan, debt, liability, insurance, loss, enterprise.
- In terms of the bill for goods & services provided: account, bill, statement, balance, invoice, charge, tab, price, tariff, the amount due.
- Loss of money by a business or an organization: loss, debt, deficiency, deplete, indebtedness, sacrifice.
- Something is given as a reward: payment, hire, pay, wage, earnings, profit, advance, allowance, consideration, compensation, reward, income, award.
Categories of Expenses
Expenses are generally divided into two categories:
- Direct expenses
- Indirect expenses
Direct expenses: These are the expenses which are related to the purchases of products or goods.
Examples of Direct Expenses:
- purchase price of goods
- wages on goods
- insurance of goods
- custom duty
Indirect expenses: These are those expenses which are not related to the purchases of goods. They are generally referred to as the expenses result in the daily business operation.
Examples of Indirect Expenses:
- salaries paid
- rent paid
- legal charges
Expenses a debit or credit
Debit means what comes in while Credit means what goes out but in accounting, debit regarded as what goes out of the account whereas the credit what comes in the account. The debit is recorded on the left side of the ledger while credit is recorded on the right side of the ledger.
- A debit increases the expense account.
- A credit decreases the expense account.
Expenses in the accounting equation
As accounting equation states that (Assets Formula):
Assets calculation formula= Liabilities + Owner’s equity
Owner’s equity calculation formula = revenue – (expenses + dividends)
So, the accounting equation for expenses will be:
Assets = Liabilities + Revenue – (Expenses + Dividends)
Other different types of expenses incurred in business are:
Accrual expenses are those expenses which are recorded in the books of account before it has been paid.
Example of accrual expense: Electricity bill
In accrual expenses, it will be recorded as an expense because the service has been already consumed. In accrual accounting, it does not matter whether the payment has been done or not.
Prepaid expenses are those expenses which have been paid before the service has been incurred. In simple words, you can say that it is an advanced payment which has been paid to receive goods and services in the future.
These expenses are regarded as assets because they have future economic benefit/profit.
General & Administrative expenses are those expenses which are required to run and operate a management business. These expenses include:
- accounting staff wages and benefits
- building rent
- depreciation on the office equipment
- legal staff wages and benefits
Distribution expenses are those expenses which occur while delivering the product from the production site to the end-user. It includes transport expense, packing, etc.
Selling expense are those expenses which are required for the company’s sales. They rise and fall with sales. These expenses include:
- Distribution costs such as packing, shipping, the insurance cost.
- Marketing costs such as advertisement, website maintenance, etc.
- Selling costs such as commissions, discount, salary to the sale’s department.
Office expenses are those expenses related to the activities of the business.
Example: Computer software costs, telephone costs, internet costs, office equipment costs, advertisement costs, etc.
Utility expenses are those expenses which occur as a result of using utilities such as electricity, water, water disposal, heating, etc.
Pantry expenses: These are the expenses which occur in a small room which is regarded as a small kitchen in an organization, where food-items, tableware is stored for the distribution of refreshment (water, tea, coffee, etc.) directly to people in need. It includes refreshments costs such as tea, snacks, etc.
Medical expenses are those expenses which are related to the health of the employees, their families, etc.
Stationary expenses are those expenses which related directly with the cost of stationery items. It includes printing expenses, etc.
Account expenses: These are the expenses which result as the cost of doing or running a business.
i.e. the sum of all business activities which results in a profit.
Unpaid expenses: These are the expenses which have not been yet paid but they are recorded in book-keeping and accounting.
For example, accounts payable.
Insurance expenses: It is the amount of cost which is paid to get an insurance contract.
For example, an additional premium.
Loan expenses: It is an amount of money which is owed by an organization from the outsiders.
For example, interest payment, principal payment, etc.
Staff-welfare expenses: These are the expenses which are neither personal nor official, but they are regarded as business expenses.
For example, tea, refreshment, medical expenses, the uniform was given to the employers (uniform expenses).
The value of Fixed Asset is decreased with time. This decrease in the value of the Assets is known as the Depreciation. Depreciation or decrease in the value of the Fixed Asset is recorded as the company’s expense and is known as the depreciation expense. Recording the depreciation expense in the income statement will decrease the tax value of the Asset.
Expenses VS Liabilities
An expense is a cost required by an organization for its operations or projects to generate income or profit. An expense is money spent by a company to generate services and on goods. Expenses are recorded in the income statement.
Liability is a legal responsibility to pay obligations and debt that a company owes from the outsiders. In simple words, you can say that liabilities are the obligations and debt which are owed by a company from outsiders for business operations. Liabilities are recorded in the balance sheet of the business.
Expenses VS Expenditure
- Expenses are the costs which are spent to earn sales or something that has a value.
- Expense is the short-term basis, the value spent to run the business daily.
- Examples of expenses: salary paid, rent paid, wages, etc.
- Expenditures are those costs which are used for the purchase of an asset.
- Expenditure is the value spent on an asset for a long -term which can give long-term benefits.
- Examples of expenditures: building expenditure, furniture expenditure, purchase of new land.
- There are two types of expenditures in accounting books: Capital expenditure & Revenue expenditure.
Capital expenditure vs revenue expenditure
Capital expenditure: Capital included those expenses which have the benefit of more than one year. These are those expenditures which are used to purchase or increased the value of an asset. These expenses are recorded as an asset in the income statement and depreciated over their life.
Examples of Capital expenditure:
- Purchase of car
- registration of land.
Revenue expenditure: These are those expenses which have the benefit of one year or less than one year. These expenditures whose benefits are acquired after the compilation of an accounting year. These expenses are recorded as profit and loss when they are incurred.
Examples of Revenue expenditure: