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.
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