Definition
The term expense is used to describe the outflow of money to pay for a product or service. In financial accounting, expenses are defined as the cost of goods sold, or services used up, in the process of producing revenues for a company. The expenses of a company are reported on the income statement.
Explanation
Expenses are sometimes referred to as the cost of doing business, since these expenditures include all the items needed to attract and service customers in order to produce revenue.
Financial accounting for expenses can happen in a number of ways. The outflow of money from a company creates a decrease in owner's equity, since expenses are likely to cause a decrease in assets, such as cash. Alternatively, an expense can cause an increase in liabilities, such as accounts payable.
Typical categories of expenses found on the income statement would be as follows:
Cost of Goods Sold: includes labor and raw materials
Operating Expenses: includes research and development, selling, general and administrative expenses
Other: includes depreciation and amortization (non-cash expenses)
Financial: includes income taxes and interest expense
In addition to the above income statement expenses, the statement of cash flows may include:
Capital Expenditures: purchases of fixed assets, which are expected to provide benefits beyond the current year
Related Terms
The income statement is a financial accounting report that demonstrates how net income, or profit, is derived from revenues. The main categories appearing on an income statement include revenues, cost of goods sold, operating expenses, non-recurring items and net income.
Moneyzine EditorJanuary 22nd, 2024
The direct expense a company incurs when making a product, or supplying a service, such as raw materials and labor are referred to as the cost of goods sold (COGS). Also referred to as the cost of sales, the cost of goods sold appears as a line item expense on the income statement.Moneyzine EditorJanuary 12th, 2024- The financial accounting term operating expense is used to describe all of the costs associated with the ongoing operations of the company. Operating expenses appear on the company's income statement.Moneyzine EditorSeptember 20th, 2023
The financial accounting term interest expense is used to describe the interest payments that have come due on amounts borrowed by a company or an individual. Interest expense will appear as a line item on a company's income statement.Moneyzine EditorJanuary 22nd, 2024- The financial accounting term selling, general, and administrative expense, or SG&A, is used to describe the costs associated with selling a product or providing a service, and the general expenses associated with running a business. SG&A for a company can be found on the income statement.Moneyzine EditorSeptember 21st, 2023
