Glossary

Expenses

Definition

Expenses are decreases in economic benefits during a period, through cash outflows or assets used up, that reduce equity other than through distributions to owners. Salaries, rent, utilities, depreciation, interest and the cost of goods sold are typical expenses. They have a debit normal balance and are matched to the period they relate to.

How it works

On an income statement by function, expenses are grouped as cost of sales, selling and distribution, administrative, finance costs and income tax. Grouping matters because gross profit and operating profit are computed between these lines.

An expense is not the same as a payment. Paying a year of insurance up front creates a prepaid expense that becomes an expense month by month, while wages earned but unpaid at month end are an accrued expense. Buying a machine is not an expense at all: it is an asset that is expensed gradually through depreciation.

Example: recording a monthly rent expense

A shop pays rent of 2,500 for March on 1 March. It debits rent expense 2,500 and credits bank 2,500. If it had paid three months in advance, it would debit prepaid rent 7,500 and transfer 2,500 to rent expense at the end of each month.

Example: recording a monthly rent expense
Account	Debit	Credit
Rent expense	2,500
Bank		2,500

Related terms

Revenue
Revenue is the income a business earns from its ordinary activities, such as selling goods or providing services, measured at the amount it expects to be entitled to. Under the accrual basis it is recognised when control passes to the customer, not when cash arrives.
Accrued expense
An accrued expense is a cost incurred in the period but not yet invoiced or paid, such as wages earned by staff at month end or interest on a loan. It is recorded as an expense and a liability so the period carries its full cost.
Prepaid expense
A prepaid expense is a payment made in advance for goods or services the business will receive in future periods, such as annual insurance or rent paid up front. It starts as an asset and is expensed as the period it covers passes.
Cost of goods sold (COGS)
Cost of goods sold is the cost of the inventory a business sold during a period: purchase or production cost plus the costs of bringing goods to their saleable condition. It equals opening inventory plus purchases minus closing inventory.
Depreciation
Depreciation is the systematic allocation of the cost of a tangible fixed asset, less its residual value, over its useful life. Each period's charge is an expense credited to accumulated depreciation, so the asset's carrying amount falls over time.
Income statement (profit and loss)
The income statement reports revenue, expenses and the resulting profit or loss for a period. Presented by function, it shows revenue, cost of sales, gross profit, operating expenses and net profit.

Guides

IFRS Financial Statements: How the Balance Sheet, Income Statement and Cash Flow Fit Together

Free calculators

Break-even calculator

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FAQ

Questions about Expenses

What is the difference between a cost and an expense?

A cost is the amount spent to acquire something. It becomes an expense when the benefit is used up in a period; inventory bought is a cost held as an asset until it is sold and becomes cost of goods sold.

Is depreciation an expense?

Yes. Depreciation is a non-cash expense that spreads the cost of a fixed asset over the years it is used.

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