Expenses are the amount of assets used up by the company in order to generate revenue. In other words, expenses are the costs the company must incur in order to generate revenue. Some common examples of expenses are listed below.
Examples of Accounting Business Expenses:
- Employee Salaries
- Utilities
- Cost of Inventory (Cost of Goods Sold)
- Interest Expense
- Administrative Expenses
- Depreciation Expenses
- Prepaid Expenses
Expenses are Found on the Income Statement
The expenses of a company are found on the income statement that is generated at the end of the year. Below is an example income statement that shows some common expenses:
Recognizing Expenses is Tricky
People often get confused about when to recognize accounting expenses. There are a lot of rules behind it (thank you FASB and IASB) but the general idea is that you recognize the expense when revenue is recognized. This goes back to the definition of an expense: the amount of assets used up in order to generate revenue (matching expenses to revenues is also known as the matching principle).
Let’s take a look at an example of recognizing expenses. Let’s pretend that you own a company that buys calculators wholesale, marks them up, and sells them for a profit. You are a retailer of calculators. When you purchase a batch of 200 calculators from your supplier this is not an expense because revenue is not being generated. You are exchanging one asset (cash) for another asset (inventory/calculators). The journal entry would look like this.
Now, let’s pretend that you sell the 200 calculators. You are giving up an asset (calculators) for sales revenue. When you exchange an asset for sales revenue, you have an expense. The journal entry would look like this:
Quick Note on Accrued Expenses
Because most accounting systems these days are based on accrual accounting, you will often see the term “accrued expenses.” Accrued expenses are simply those expenses that have been incurred but they haven’t been paid for in cash yet.
