Accounts Expenses – Definition, Types And Categories
What are Accounts Expenses?
Definition: Accounts expenses are defined as those expenditures that a company makes to ensure the smooth running of the business. These expenses represent the cost of doing business. All the accounts expense is deducted from the revenue to determine the net revenue of the company.
Accounts expenses are the cost of operations that a company incurs to carry the daily routine activities and generate revenue. In a business, there are various types of expenses that they incur. Some of the ordinary expenses of the business include wages to employees, payment to the vendors, factory leases, equipment depreciation, taxes, and other related expenses.
However, it is essential to understand the difference between cost and expenses. Cost is the monetary value that the company gives up to buy an asset. At the same time, expense means the cost that is incurred on activities for generating revenue. So, we can say that all expenses cost, but not all costs are expenses.
Categories of Expenses
Expenses are generally categorized into operating vs. non-operating as well as fixed vs. variable. Let us have a look at some of the common instances of these expense categories-
1. Operating & Non-Operating
Marketing, advertising, and promotion, Cost of Goods Sold (COGS), Salaries, benefits, and wages, Rent and insurance, Selling, general, and administrative (SG&A), Depreciation and amortization, etc are some of the examples of operating expenses, while taxes, impairment charges, interest expense, etc are examples of non-operating expense.
2. Fixed & Variable
Rent, Salaries, benefits, etc are examples of fixed expense while transaction fees and commissions are examples of variable expense. In addition to these, wages as well as marketing and advertising, etc are sometimes fixed and sometimes variable expense.
Understanding Expense in Expense Accounts
An expense can be defined in the following ways:
1. Depreciation expense. Depreciation expense is the expense that is charged to reduce the book value of the capital assets.
2. Office supplies use up cash
3. A prepaid expense, for instance, prepaid rent.
While calculating the net profit for the business, all the expenses are deducted from the company’s total income.
Every business uses double-entry bookkeeping. In the double-entry system, expenses are recorded as a debit to that specific expense account. The corresponding entry will either decrease the assets or increases the liabilities of the business.
Types of Account Expenses
Expenses have a significant impact on the income statement. These expenses can be reflected in these five major headings of the income statement:
1. Cost of Goods Sold (COGS)
Cost of Goods Sold (COGS) is the cost that a company spends on the sold goods to acquire the raw material and to finish it into the final product. In COGS, the selling and administrative expenses and the interest expenses are not included. COGS include direct labor, direct material, and production overhead. However, the cost of the goods sold can vary per the type of the company. For instance, if a company is a manufacturing unit, then the COGS will be direct labor, direct material, and manufacturing overhead. If it is a service company, then the COGS will be called as cost of services. If the company sells both goods and services, then it will be the cost of sales.
2. Operating Expenses
Operating expenses are the expenses that a company incurs on its operating activities. This includes sales salaries, advertising, insurance, benefits, wages, and rent. The other operating expenses can be general and administrative expenses, R&D, travel expenses, training expenses, and IT expenses.
3. Financial Expenses
Financial expenses are the cost that incurs from borrowing from lenders or creditors. These are the expenses outside the company’s core business. These expenses include loan origination fees or interest on loan borrowed.
4. Extraordinary Expenses
Extraordinary expenses are the cost that is incurred by the companies for large one time-events or transactions. These transactions are outside the company’s core business activities. This can include laying off employees, selling any land, or disposing of any significant asset.
5. Non-operating Expenses
Non-operating expenses are the cost that cannot be linked to operating revenues. The most common non-operating expense is interest expenses. The interest payment on any bank loan does not generate any kind of operating income. The other non-operating expenses include taxes and impairment charges.
What is the Difference between Expense and Capital Expenditure?
The basic and only difference between Expense and Capital Expenditure is that the expenses are reflected in the income statement when a company follows the accrual principle of accounting, while on the other side, capital expenditure goes directly to the balance sheet. When a capital expenditure moves directly to the balance sheet, it is later expensed as depreciation and amortization, which is recorded in the income statement.
How are Accounts Expense Recorded in the Books of Accounts?
The accounting expense can be recorded on two bases, i.e., on a cash basis and accrual basis. It is completely dependent on the accounting system that a company is following. In the accrual basis of accounting, expenses are recorded at the time it incurs irrespective of its payment. While in the cash basis of accounting, the expenses are recorded at the time when actual cash is paid for them. Accrual-based accounting is based on the principle of matching. This principle ensures that accurate profits are reflected in every accounting period.
For instance, if a company calls a carpet cleaner to clean the carpets in the office on a particular day, then the company that follows the cash accounting system will record this transaction only when it pays the invoice bill. On the other hand, if the company is following the accrual accounting system, then the company accountant will record this transaction when the company receives the service, irrespective of the payment.
However, when account expenses are concerned, most of the businesses use an accrual accounting system so that they match up in every accounting period.
Accounts Expense that is Tax-Deductible
Expenses are indeed deductible from the company’s revenue, but not all expenses are deductible from the company’s income to calculate taxable income. The business expenses must be both ordinary and necessary.
Ordinary expenses are the expense that is common or accepted in the respective industry while the necessary expenses are the expenses that help earn income for the business. The owners of the businesses can claim business deductions, but expenses like personal or non-business expenses are not allowed to be considered for a tax deduction.
The tax-deductible expenses include amortization, depreciation, salaries, rent, benefits, marketing, advertising, promotion, and wages. However, the items that come under the tax deduction can vary as per the region or country. So, a company needs to consult a professional tax advisor to know better about the deductible and non-deductible items for the concerned company.
It is clear that expense is actually the money spent or the costs incurred by businesses for generating revenues.
All in all, your account expense will be the cost of doing your business. They will be the sum of all the different activities that your business might do to generate a profit.
Now it is your turn to define account expense in your words in the comment section below!
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July 21 2021 | Hitesh Bhasin