What Is an Expense?

An expense is a cost that a company incurs to generate revenue. Common expenses include payme🅷nts to suppliers, employee wages, factory leases, and equipment depreciation.

Expenses are generally categorized a🌊s operating expenses or non-operating expe𓂃nses.

Understanding Expenses

One of a company's main goals is to maximize profits. This is achieved by boosting revenues while keeping expenses in check. However, if expenses are cut too much, it could have a detrimental effect. For example, paying less on advertising reduces costs, but it also lowers the company’s visibility and ability to reach out to potential customers.

Businesses are allowed to write off tax-deductible expenses on their income tax returns to lower their 澳洲幸运5官方开奖结果体彩网:taxable income and thus their tax liability. However, the 澳洲幸运5官方开奖结果体彩网:Internal Revenue Service (IRS) has strict rules on which expenses bu🍸si꧃nesses are allowed to claim as a deduction.

How Expenses Are Recorded

Companies break down their revenues and expenses in their 澳洲幸运5官方开奖结果体彩网:income statements. Accountants record expenses through one of two accounting 𝔉methods: cash basis or accrual basis. Under cash basis accounting, expenses are recorded when they are paid. In contrast, under the accrual method, expenses ♚are recorded when they are incurred.

For example, sa✅y a business owner schedules a carpet cleaning. If the company uses the cash basis method, the accountant would record the expense when the company pays the invoice. If the company uses the accrual method, the accountant would record the expense when the company receives the service.

Expenses are generally recorded on an accrual basis, ensꩲuring that they match up with the revenues repoꦐrted in accounting periods.

Types of Business Expenses

There are two main categories of business expenses in𒐪 accounting: operating expenses and non-operating expenses.

Operating Expenses

Operating expenses are the expenses related to a company’s main activities, such as the cost of goods sold, administrative fees, office supplies, direct la🤪bor, and rent. These are the expenses that are incurred from normal, day-to-day activities.

Operating expenses are de🧜ducted from revenues to arrive at operating income, which is the amount of profit a company earns from its direct business activities.

Non-Operating Expenses

澳洲幸运5官方开奖结果体彩网:Non-operating expenses are not directly related to the company's core operations. Common examples include interest charges and other costs associated with borro🥀wing money. These are expenses that occur outside of a company's day-to-day activities. These costs may occur from restructuring, reorganizing, interest charges on debt, or on obsolete inventory.

Non-operating expenses are kept separate from operating expenses from an accounting perspective so it's clear how much a company earns from its core activities.

Special Considerations

Capital Expenses

澳洲幸运5官方开奖结果体彩网:Capital expenditures, commonly known as CapEx, are funds used by a company to acquire, upgrade, and maintain physical assets such a🐲s property, buildings, an industrial plant, technology, or equipment.

The IRS treats 澳洲幸运5官方开奖结果体彩网: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 澳洲幸运5官方开奖结果体彩网:capitalized or written off slowly over time.

The IRS has a sched⭕ule that dictates the portio🦄n 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.

Not All Expenses Can Be Deducted

According to the IRS, to be 澳洲幸运5官方开奖结果体彩网:deductible, a business expense "must be both ordinary and necessary." Ordinary means the expense is common or accepted in that industry, while necessary means the expense is crucial to earning income. Business owners are not allowed to claim their personal, non-business expenses as business deductions. They also cannot claim lobbying expenses, penalties, and fines.

The Bottom Line

An expense is a cost that a business incurs in running its operations. Expenses include wages, maintenance, rent, and depreciation. Expenses are deducted from revenue to arrive at profits. Businesses are allowed to deduct certain expenses to help alleviate their tax burden. However, if you have questions about what's deductible, it's typically a good idea to consult with a tax expert.