Expense

Expenses are any cost of doing business that result from revenue-generating expenses. Expense or expenditure is defined as an outflow of money to another person or group to pay for an item or service, or for a category of costs. Expenses also mean the economic costs that a business incurs through its operations and to earn revenue. To maximize profits of a business, a company should make an attempt to reduce the expenses without reducing the revenues generated.

Expenses are an important indicator of a business’s operation and hence there are specific accounting rules on expense recognition. The expenses are expired cost. The expense recognition transforms assets of unexpired costs into expired costs. It effects reduction in the owners' equity and also moves assets from the balance sheet to the income statement as they are expended. Expenses are a cost associated with an object whose benefits have been obtained or recorded. For example cost of goods sold in an expense. The types of expenses that go into COGS are the cost of raw materials, storage, direct labor costs and factory overhead.

Expenses are money spent or costs incurred that are tax-deductible and reduce taxable income. The tax authorities lay down specific rules and regulations that allow people to deduct certain expenses if they are used for business-related activities. For example as salesman can deduct traveling expenses as a business deduction as those costs are integral to the part of the job.

Expenses can take any form. Expenses may take the form of actual cash payments such as wages and salaries, a computed 'expired' portion like depreciation of an asset, or an amount taken out of the firm's earnings such as bad debts. Expenses are therefore summarized and charged in the firm's income statement as deductions from the income before assessing income tax.

Questions

• What is an expense?
• What are the various forms in which the expenses may be recorded in a business?