In common usage, an expense or expenditure is an outflow of money to
another person or group to pay for an item or service, or for a
category of costs. For a tenant, rent is an expense. For students or
parents, 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, refreshments, a feast, etc.
In accounting, 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 is used up or a liability is incurred.
In terms of the accounting equation, expenses reduce owners' equity.
Accounting Standards Board defines expenses as
...decreases in economic benefits during the accounting period in the
form of outflows or depletions of assets or incurrences of liabilities
that result in decreases in equity, other than those relating to
distributions to equity participants.
Bookkeeping for expenses
3 Deduction of business expenses under the United States tax code
5 See also
7 External links
Bookkeeping for expenses
In double-entry bookkeeping, expenses are recorded as a debit to an
expense account (an income statement account) and a credit to either
an asset account or a liability account, which are 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.
In a cash flow statement, expenditures are divided into operating,
investing, and financing expenditures.
Operational expense – salary for employees,...
Capital expenditure – buying equipment
Financing expense – interest expense for loans and bonds
An important issue in accounting is whether a particular expenditure
is classified as an expense, which is reported immediately on the
business's income statement; or whether it is classified as a capital
expenditure or an expenditure subject to depreciation, which is not an
expense. These latter types of expenditures are reported as expenses
when they are depreciated by businesses that use accrual-basis
accounting, which is most large businesses and all C corporations.
The most common interpretation of whether an expense is of capital or
income variety depends upon its term. Viewing an expense as a purchase
helps alleviate this distinction. If, soon after the "purchase", that
which was expenses holds no value then it is usually identified as an
expense. If it retains value soon and long after the purchase, it will
be viewed as capital with life that should be amortized/depreciated
and retained on the balance sheet.
Deduction of business expenses under the United States tax code
For tax purposes, the 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 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
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
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)
Welch v. Helvering
Welch v. Helvering defines this as necessary for the
development of the business at least in that they were appropriate and
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
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 that mounted throughout 2002 and 2003
was whether companies should report the granting of stock options to
employees as an expense on the income statement, or should not report
this at all in the income statement, which is what had previously been
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.
Cash flow statement
Amortization / Depreciation
Stock Option Expensing
Expenses versus Capital Expenditures
^ IFRS Framework, F.70
Capital expenditures must recovered over a period of years through
depreciation and amortization. See also
Expenses versus Capital
^ For more on this subject, see Donaldson, Samuel A., Federal Income
Taxation of Individuals: Cases, Problems and Materials 170-73 (2d ed.
^ 26 U.S.C. § 162(a)
^ Welch v. Helvering, 290 U.S. 111, 113 (1933)
^ 26 U.S.C. § 212
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