Expense Definition - Investopedia

An expense is the cost of operations that a company incurs to generate revenue. As the popular saying goes, “it costs money to make money.”. Business BusinessEssentials WhatisanExpense? Anexpenseis thecostofoperationsthatacompanyincurstogeneraterevenue.Asthepopularsayinggoes,“itcostsmoneytomakemoney.” Commonexpensesincludepaymentstosuppliers,employeewages,factoryleases,andequipment depreciation.Businessesareallowedtowriteofftax-deductibleexpensesontheirincometaxreturnstolowertheir taxableincome andthustheirtaxliability.However,theInternalRevenueService(IRS)hasstrictrulesonwhichexpensesbusinessesareallowedtoclaimasadeduction. KeyTakeaways Anexpenseis thecostofoperationsthatacompanyincurstogeneraterevenue.Businessescanwriteofftax-deductibleexpensesontheirincometaxreturns,providedthattheymeettheIRS’guidelines.Accountantsrecordexpensesthroughoneoftwoaccountingmethods:cashbasisoraccrualbasis.Therearetwomaincategoriesofbusinessexpensesinaccounting:operatingexpensesandnon-operatingexpenses.TheIRStreatscapitalexpensesdifferentlythanmostotherbusinessexpenses. 1:28 OperatingExpenses UnderstandingExpenses Oneofthemaingoalsofcompanymanagementteamsistomaximizeprofits.Thisisachievedbyboostingrevenueswhilekeepingexpensesincheck.Slashingcostscanhelpcompaniestomakeevenmoremoneyfromsales. However,ifexpensesarecuttoomuchitcouldalsohaveadetrimentaleffect.Forexample,payinglessonadvertisingreducescostsbutalsolowersthecompany’svisibilityandabilitytoreachouttopotentialcustomers. HowExpensesAreRecorded Companiesbreakdowntheirrevenuesandexpensesintheirincomestatements.Accountantsrecordexpensesthroughoneoftwoaccountingmethods:cashbasisoraccrualbasis.Undercashbasisaccounting,expensesarerecordedwhentheyarepaid.Incontrast,undertheaccrualmethod,expensesarerecordedwhentheyareincurred. Forexample,ifabusinessownerschedulesacarpetcleanertocleanthecarpetsintheoffice,acompanyusingcashbasisrecordstheexpensewhenitpaystheinvoice.Undertheaccrualmethod,thebusinessaccountantwouldrecordthecarpetcleaningexpensewhenthecompanyreceivestheservice.Expensesaregenerallyrecordedonanaccrualbasis,ensuringthattheymatchupwiththerevenuesreportedinaccountingperiods. Important Expensesareusedtocalculatenetincome.Theequationtocalculate netincome isrevenuesminusexpenses. TwoTypesofBusinessExpenses Therearetwomaincategoriesofbusinessexpensesinaccounting:  Operatingexpenses:Expensesrelatedtothecompany’smainactivities,suchasthecostofgoodssold,administrativefees,andrent. Non-operatingexpenses:Expensesnotdirectlyrelatedtothebusiness'coreoperations.Commonexamplesincludeinterestchargesandothercostsassociatedwithborrowingmoney. SpecialConsiderations CapitalExpenses Capitalexpenditures,commonlyknownas CapEx,arefundsusedbyacompanytoacquire,upgrade,andmaintainphysicalassetssuchasproperty,buildings,anindustrialplant,technology,orequipment. TheIRStreatscapitalexpensesdifferentlythanmostotherbusinessexpenses.Whilemostcostsofdoingbusinesscanbeexpensedorwrittenoffagainstbusinessincometheyeartheyareincurred,capitalexpensesmustbecapitalizedorwrittenoffslowlyovertime. TheIRShasaschedulethatdictatestheportionofacapitalassetabusinessmaywriteoffeachyearuntiltheentireexpenseisclaimed.Thenumberofyearsoverwhichabusinesswritesoffacapitalexpensevariesbasedonthetypeofasset. NotAllExpensesCanBeDeducted Accordingtothe IRS,tobedeductible,abusinessexpense"mustbebothordinaryandnecessary."Ordinarymeanstheexpenseiscommonoracceptedinthatindustry,whilenecessarymeanstheexpenseishelpfulinthepursuitofearningincome.Businessownersarenotallowedtoclaimtheirpersonal,non-businessexpensesasbusinessdeductions.Theyalsocannotclaim lobbyingexpenses,penalties,andfines. InvestorscanrefertoPublication535,BusinessExpenses ontheIRSwebsiteformoreinformation. ArticleSources Investopediarequireswriterstouseprimarysourcestosupporttheirwork.Theseincludewhitepapers,governmentdata,originalreporting,andinterviewswithindustryexperts.Wealsoreferenceoriginalresearchfromotherreputablepublisherswhereappropriate.Youcanlearnmoreaboutthestandardswefollowinproducingaccurate,unbiasedcontentinour editorialpolicy. InternalRevenueServices."TangiblePropertyRegulations-FrequentlyAskedQuestions." InternalRevenueService."Publication535(2021),BusinessExpense." 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Themodifiedcashbasiscombineselementsofthetwomajoraccountingmethods:cashandaccrualaccounting. more OperatingExpenseDefinitionandHowItComparestoCapitalExpenses Anoperatingexpenseisanexpenditurethatabusinessincursasaresultofperformingitsnormalbusinessoperations. more UnderstandingDepreciation Depreciationisanaccountingmethodofallocatingthecostofatangibleassetoveritsusefullifetoaccountfordeclinesinvalueovertime. more Transaction Atransactionisafinalizedagreementbetweenabuyerandaseller,butitcangetabitmorecomplicatedfromanaccountingperspective. more PartnerLinks RelatedArticles SmallBusinessTaxes Top10HomeBusinessTaxTips CompanyProfiles WhatIsAccrualAccountinginOracleApps? Accounting WhyDoesGAAPRequireAccrualBasisRatherThanCashAccounting? SmallBusiness MoneyGuideforSelf-EmployedParents FinancialCrime&Fraud CashFlowonSteroids:WhyCompaniesCheat Accounting ThedifferencebetweenCAPEXandcurrentexpenses