The different costs in operating a business Revenue, costs, profit and loss OCR GCSE Business Revision OCR BBC Bitesize

types of expenses

Explore these skills and more with Forage’s free accounting virtual experience programs. The total cost of the plant ($39 million) is an expenditure, while each annual chunk of that cost ($1 million each year) is an expense. Discover if finance or accounting is the right career path for you with a free Forage job simulation. In such cases, it would make sense to compile such expenses under the miscellaneous expenses. This includes the cost of electricity, natural gas, and the running cost of backup generators.

types of expenses

These obligations include mortgages or rent, employee salaries, insurance costs, loan payments, and property taxes. An expense is money spent to acquire something — expenses includes daily transactions everyone encounters (like paying a phone bill) and big purchases made by companies (like buying a new piece of machinery). While some people may track their personal expenses for budgeting purposes, businesses and accountants have strict guidelines on what counts as an expense. When cash basis of accounting is used, the rent expense for an accounting period is equal to the rent paid during an accounting period. Cost of Goods Sold (COGS) is the cost of acquiring raw materials and turning them into finished products.

Expenses Definition

Staff traveling expense includes the cost of any travel by the employees that is borne by the employer for attending business meetings, conferences, site visits, etc., that are held outside of their usual workplace. Recording the bad debt expense and the provision for doubtful receivables brings the value of the receivables shown in the balance sheet closer to what is likely to be received by the business in the future. A bad debt expense is recorded for any specific receivables that are unlikely to pay back (e.g., any customers who have filed for bankruptcy). Whenever a business suspects that it may not recover the full amount of its receivables, it should record the loss immediately in its income statement in line with the prudence concept. Instead, it is added to the cost of the asset and charged as a depreciation or impairment expense over its useful life. When calculating the cost of goods sold for a manufacturing business, we need to take into account the cost of all inputs used in the production process.

  • Knowing how well a business is performing requires an understanding of the financial performance of the business.
  • Organizations frequently require external help from professionals such as CPAs, lawyers, and consultants to fill the gap between their requirements and the availability of internal resources.
  • Payment of dividends on ordinary share capital is not considered as an expense of the company but treated as a distribution to owners.
  • A provision for doubtful debts is necessary to account for any non-payments that are not yet obvious but can be reasonably expected.
  • Insurance cost is not capitalized in the balance sheet because it is a recurring expense that is necessary to preserve rather than enhance an asset’s usefulness.

The revenue for each period is matched to the expenses incurred in earning that revenue during the same accounting period. For example, sale commission expenses will be recorded in the period that the related sales are reported, regardless of when the commission was actually paid. An expense in accounting is the money spent, or costs incurred, by a business in their effort to generate revenues. Essentially, accounts expenses represent the cost of doing business; they are the sum of all the activities that hopefully generate a profit.


Businesses are allowed to deduct certain expenses from taxes to help alleviate the tax burden and bulk up profits. Expenses can be defined as fixed expenses, such as rent or mortgage; those that do not change with the change in production. Expenses can also be defined A CPAs Perspective: Why You Should or Shouldnt Work with a Startup as variable expenses; those that change with the change in production. Expenses can also be categorized as operating and non-operating expenses. The former are the expenses directly related to operating the company, and the latter is indirectly related.

types of expenses

Other companies may group all operating expenses together as one category, though. Non-operating expenses are the opposite of operating expenses — costs that are not directly related to a business’s core function. The cost of rent relating to production and sales activities are charged to the cost of sales and selling expenses instead of operating, general, and administrative expenses. An expense is a cost that businesses incur in running their operations.

Types of Expenses

The payroll cost of such employees should be included in the cost of sales and selling expenses instead. An expense is a type of expenditure that flows through the income statement and is deducted from revenue to arrive at net income. Due to the accrual principle in accounting, expenses are recognized when they are incurred, not necessarily when they are paid for. As with depreciation expense, repair and maintenance expenses need to be allocated between the cost of sales, selling expenses, and operating cost depending on where the assets are in use. Loans from banks usually require interest payments, but such payments don’t generate any operating income. Accrual accounting is based on the matching principle that ensures that accurate profits are reflected for every accounting period.

  • Instead, it is added to the cost of the asset and charged as a depreciation or impairment expense over its useful life.
  • Instead, its cost is spread over its useful life in the form of depreciation.
  • Expenses are generally recorded on an accrual basis, ensuring that they match up with the revenues reported in accounting periods.
  • Costs are payments that a business must make in order to obtain the resources that they need to provide goods and services to customers.
  • The payroll cost of such employees should be included in the cost of sales and selling expenses instead.
  • To learn more, check out CFI’s free tutorial on how to link the three financial statements in Excel.

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