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Expenditure is an outflow of
money Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. The main functions of money are distinguished as: a ...

money
, or any form of
fortune Fortune may refer to: General * Fortuna or Fortune, the Roman goddess of luck * Luck, a chance happening, or that which happens beyond a person's controls * Wealth, an abundance of items of economic value * Fortune, a prediction made in fortune-te ...

fortune
in general, to another person or group as payment for an item, service, or other category of
cost In production Production may be: Economics and business * Production (economics) * Production, the act of manufacturing goods * Production, in the outline of industrial organization, the act of making products (goods and services) * Production ...

cost
s. For a tenant,
rent Rent may refer to: Economics *Renting Renting, also known as hiring or letting, is an agreement where a payment is made for the temporary use of a good, service or owned by another. A is when the pays a flat rental amount and the pays ...
is an expense. For students or parents,
tuition Tuition payments, usually known as tuition in American English and as tuition fees in English in the Commonwealth of Nations, Commonwealth English, are fees charged by education institutions for instruction or other services. Besides public spen ...

tuition
is an expense. Buying food, clothing, furniture or an automobile is often referred to as an expense. An expense is a cost that is "paid" or " remitted", usually in exchange for something of value. Something that seems to cost a great deal is "expensive". Something that seems to cost little is "inexpensive". "Expenses of the table" are expenses of
dining A restaurant is a business Business is the activity of making one's living or making money by producing or buying and selling products (such as goods and services). Simply put, it is "any activity or enterprise entered into for profit." ...

dining
, refreshments, a
feast A banquet (; ) is a formal large meal or feast, where a number of people consume food together. Banquets are traditionally held to enhance the prestige of a host, or reinforce social bonds among joint contributors. Modern examples of these pur ...

feast
, etc. In
accounting Accounting or Accountancy is the measurement ' Measurement is the number, numerical quantification (science), quantification of the variable and attribute (research), attributes of an object or event, which can be used to compare with other ob ...
, expense has a very specific meaning. It is an outflow of cash or other valuable assets from a person or company to another person or company. This outflow of cash is generally one side of a trade for products or services that have equal or better current or future value to the buyer than to the seller. Technically, an expense is an event in which an
asset In financial accounting Financial accounting is the field of accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such a ...
is used up or a
liability Liability may refer to: Law * Legal liability, in both civil and criminal law ** Public liability, part of the law of tort which focuses on civil wrongs ** Product liability, the area of law in which manufacturers, distributors, suppliers, retai ...
is incurred. In terms of the
accounting equation The fundamental accounting equation, also called the balance sheet equation, represents the relationship between the assets, liability (accounting), liabilities, and Equity (finance), owner's equity of a person or business. It is the foundation for ...
, expenses reduce owners'
equity Equity may refer to: Finance, accounting and ownership *Equity (finance), ownership of assets that have liabilities attached to them ** Stock, equity based on original contributions of cash or other value to a business ** Home equity, the differe ...
. The
International Accounting Standards Board The International Accounting Standards Board (IASB) is the independent, accounting standard Publicly traded companies typically are subject to the most rigorous standards. Small and midsized businesses often follow more simplified standards, plus ...
defines expenses as: Expense is a term also used in
sociology Sociology is a social science Social science is the branch The branches and leaves of a tree. A branch ( or , ) or tree branch (sometimes referred to in botany Botany, also called , plant biology or phytology, is the scie ...
, in which a particular fortune or price is sacrificed voluntarily or involuntarily by something or someone to something or somebody else, often in the context that the latter is taking advantage of the former.


Bookkeeping for expenses

In
double-entry bookkeeping Double-entry bookkeeping, also known as, double-entry accounting, is a method of bookkeeping Bookkeeping is the recording of financial transactions, and is part of the process of accounting Accounting or Accountancy is the measureme ...
, expenses are recorded as a
debit Debits and credits in double entry bookkeeping are entries made in account ledger A ledger is a book or collection of accounts in which account transactions are recorded. Each account has an opening or carry-forward balance Balance may refe ...

debit
to an expense account (an
income statement An income statement or profit and loss accountProfessional English in Use - Finance, Cambridge University Press, p. 10 (also referred to as a ''profit and loss statement'' (P&L), ''statement of profit or loss'', ''revenue statement'', ''statemen ...
account) and a
credit px, Domestic credit to private sector in 2005 Credit (from Latin Latin (, or , ) is a classical language belonging to the Italic languages, Italic branch of the Indo-European languages. Latin was originally spoken in the area around Rome, k ...
to either an asset account or a liability account, which are
balance sheet In financial accounting Financial accounting is the field of accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such a ...

balance sheet
accounts. An expense decreases assets or increases liabilities. Typical business expenses include salaries, utilities, depreciation of capital assets, and interest expense for loans. The purchase of a capital asset such as a building or equipment is not an expense.


Cash flow

In a
cash flow statement In financial accounting, a cash flow statement, also known as ''statement of cash flows'', is a financial statements, financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the a ...
(flow of funds statement), expenditures are divided into three categories: * Operating:
Operational expense An operating expense, operating expenditure, operational expense, operational expenditure or opex is an ongoing cost for running a product, business, or system . Its counterpart, a capital expenditure (capex), is the cost of developing or provid ...
– salary for employees * Investing:
Capital expenditure Capital expenditure or capital expense (capex or CAPEX) is the money an organization or corporate entity spends to buy, maintain, or improve its fixed assets, such as buildings, vehicles, equipment, or land. It is considered a capital expenditure ...
– buying equipment * Expenditures (financial) Financing expense
interest expense Interest expense relates to the cost In production, research Research is "creativity, creative and systematic work undertaken to increase the stock of knowledge". It involves the collection, organization, and analysis of information to i ...
for
loans In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money avai ...
and bonds Whether a particular expenditure is classified as an expense, which is reported immediately on the business's
income statement An income statement or profit and loss accountProfessional English in Use - Finance, Cambridge University Press, p. 10 (also referred to as a ''profit and loss statement'' (P&L), ''statement of profit or loss'', ''revenue statement'', ''statemen ...
or whether it is classified as a
capital expenditure Capital expenditure or capital expense (capex or CAPEX) is the money an organization or corporate entity spends to buy, maintain, or improve its fixed assets, such as buildings, vehicles, equipment, or land. It is considered a capital expenditure ...
(or an expenditure subject to
depreciation In accountancy, depreciation refers to two aspects of the same concept: first, the actual decrease of fair value of an asset, such as the decrease in value of factory equipment each year as it is used and wear, and second, the allocation in a ...

depreciation
), which is not an expense flow of funds statement. Though, these latter types of expenditures are reported as expenses when they are depreciated by businesses that use accrual-basis accounting- as most large businesses and all
C corporation A C corporation, under United States federal income tax law, is any corporation A corporation is an organization—usually a group of people or a company—authorized by the state to act as a single entity (a legal entity recognized by pri ...
s do. Defining an expense as capital or income using the most common interpretation depends upon its term. When an expense is seen as a purchase it alleviates this distinction. Soon after the purchase, (that which was expenses holds no value), then it is usually identified as an expense. It will be viewed as capital with life that should be
amortized In computer science, amortized analysis is a method for Analysis of algorithms, analyzing a given algorithm's Computational complexity theory, complexity, or how much of a resource, especially time or memory, it takes to Execution (computing), execu ...
/
depreciated In accountancy Accounting or Accountancy is the measurement ' Measurement is the number, numerical quantification (science), quantification of the variable and attribute (research), attributes of an object or event, which can be used to co ...

depreciated
and retained on the
balance sheet In financial accounting Financial accounting is the field of accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such a ...

balance sheet
if it retains value soon and long after the purchase.


Deduction of business expenses under the United States tax code

For tax purposes, the
Internal Revenue Code The Internal Revenue Code (IRC), formally the Internal Revenue Code of 1986, is the domestic portion of federal statutory tax law in the United States, published in various volumes of the United States Statutes at Large The ''United States Sta ...

Internal Revenue Code
permits the deduction of business expenses in the tax payable year in which those expenses are paid or incurred. This is in contrast to
capital expenditures Capital expenditure or capital expense (capex or CAPEX) is the money an organization or corporate entity spends to buy, maintain, or improve its fixed assets, such as buildings, vehicles, equipment, or land. It is considered a capital expenditure ...
that are paid or incurred to acquire an asset. Expenses are costs that do not acquire, improve, or prolong the life of an asset. For example, a person who buys a new truck for a business would be making a capital expenditure because they have acquired a new business-related asset. This cost could not be deducted in the current taxable year. However, the gas the person buys during that year to fuel that truck would be considered a deductible expense. The cost of purchasing gas does not improve or prolong the life of the truck but simply allows the truck to run. Even if something qualifies as an expense, it is not necessarily deductible. As a general rule, expenses are deductible if they relate to a taxpayer's trade or business activity or if the expense is paid or incurred in the production or collection of income from an activity that does not rise to the level of a trade or business (investment activity). Section 162(a) of the Internal Revenue Code is the deduction provision for business or trade expenses. In order to be a trade or business expense and qualify for a deduction, it must satisfy 5 elements in addition to qualifying as an expense. It must be (1) ordinary and (2) necessary ('' Welch v. Helvering'' defines this as necessary for the development of the business at least in that they were appropriate and helpful). Expenses paid to preserve one's reputation do not appear to qualify). In addition, it must be (3) paid or incurred during the taxable year. It must be paid (4) in carrying on (meaning not prior to the start of a business or in creating it) (5) a trade or business activity. To qualify as a trade or business activity, it must be continuous and regular, and profit must be the primary motive. An expense can be a loss or profit. But loss or profit need not really be an expense. Section 212 of the Internal Revenue Code is the deduction provision for investment expenses. In addition to being an expense and satisfying elements 1-4 above, expenses are deductible as an investment activity under Section 212 of the Internal Revenue Code if they are (1) for the production or collection of income, (2) for the management, conservation, or maintenance of property held for the production of income, or (3) in connection with the determination, collection, or refund of any tax. In investing, one
controversy Controversy is a state of prolonged public dispute or debate, usually concerning a matter of conflicting opinion An opinion is a judgement Judgement (or US spelling judgment) is also known as ''adjudication'' which means the evaluation of ...
that mounted throughout 2002 and 2003 was whether companies should report the granting of
stock option In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money availa ...
s to
employee Employment is the relationship between two party (law), parties, usually based on a employment contract, contract where work is paid for, where one party, which may be a corporation, for profit, not-for-profit organization, co-operative or ot ...

employee
s as an expense on the
income statement An income statement or profit and loss accountProfessional English in Use - Finance, Cambridge University Press, p. 10 (also referred to as a ''profit and loss statement'' (P&L), ''statement of profit or loss'', ''revenue statement'', ''statemen ...
, or should not report this at all in the income statement, which is what had previously been the norm.


Expense report

An expense report is a form of document that contains all the expenses that an individual has incurred as a result of the business operation. For example, if the owner of a business travels to another location for a meeting, the cost of travel, the meals, and all other expenses that he/she has incurred may be added to the expense report. Consequently, these expenses will be considered business expenses and are tax-deductible. Many businesses benefit from automated expense reports systems for expense management. Depending on the system chosen, these software solutions can reduce time costs, errors, and fraud.


See also

*
Amortization (business) In business, amortization refers to spreading payments over multiple periods. The term is used for two separate processes: amortization of loans and amortization of assets. In the latter case it refers to allocating the cost of an intangible asset ...
*
Balance sheet In financial accounting Financial accounting is the field of accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such ...

Balance sheet
*
Capital Expenditures Capital expenditure or capital expense (capex or CAPEX) is the money an organization or corporate entity spends to buy, maintain, or improve its fixed assets, such as buildings, vehicles, equipment, or land. It is considered a capital expenditure ...
*
Cash flow statement In financial accounting, a cash flow statement, also known as ''statement of cash flows'', is a financial statements, financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the a ...
*
Depreciation In accountancy, depreciation refers to two aspects of the same concept: first, the actual decrease of fair value of an asset, such as the decrease in value of factory equipment each year as it is used and wear, and second, the allocation in a ...

Depreciation
* Expense management *
Expenses versus Capital Expenditures Under the U.S. tax code, businesses expenditures can be deducted from the total taxable income when filing income taxes if a taxpayer can show the funds were used for business-related activities, not personal or capital expenses (i.e., long-term, t ...
*
Income statement An income statement or profit and loss accountProfessional English in Use - Finance, Cambridge University Press, p. 10 (also referred to as a ''profit and loss statement'' (P&L), ''statement of profit or loss'', ''revenue statement'', ''statemen ...
*
Operating expense An operating expense, operating expenditure, operational expense, operational expenditure or opex is an ongoing cost for running a product, business, or system . Its counterpart, a capital expenditure Capital expenditure or capital expense (cap ...
*
Per diem''Per diem'' (Latin Latin (, or , ) is a classical language belonging to the Italic languages, Italic branch of the Indo-European languages. Latin was originally spoken in the area around Rome, known as Latium. Through the power of the Roman Repu ...
*
Stock option expensingStock option expensing is a method of accounting for the value of share options, distributed as incentives to employees, within the profit and loss reporting of a listed business. On the income statement, balance sheet, and cash flow statement say th ...


References


External links


IRS Expense Guidelines
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