Expense

Financial Dictionary -> General Finance -> Expense

In the broadest sense, expense is the opposite of revenue, but it is not limited to that meaning. Expense is the money you sacrifice in order to gain revenue. To earn a maximum profit, companies make an effort to cut down on expenses without reducing revenues. Types of expenses include salaries to staff, depreciation of capital assets, payments to suppliers, factory leases, interest expense for loans, and utilities. Buying assets such as equipment or building is not considered an expense. Expenses increase the liabilities or decrease the assets. If expenses are recorded to a liability or asset account as a credit (balance sheet account) and to an expense account as a debit (income statement account), then the procedure is referred to as double-entry bookkeeping. This system was established in the 15th century and involves at least two different accounts for transactions and events. The equity equals liabilities subtracted from assets. The system is characterized by credits and debts - if the sum of debits does not equal that of credits, it can be assumed that a mistake has been made.

Expenses are divided into financing expenses, investing or capital expenses, and operating expenses in statements of cash flow. Financing expenses involve interest costs for bonds and loans. Capital expenses refer to purchasing equipment and other material facilities, while operating expenses are salary payments. Not all 'expenses', however, are considered as such. For example, expenses subject to depreciation are considered such only if the business entity employs accrual accounting. Most big companies and corporations make use of it. This system records items when they are gained. Deductions are made when expenditures are incurred.

How does one determine when income is earned? There are two ways, known as the earlier-of test and the all-events test. With the former, the taxpayer gains income when payment is due, payment is made (depending on which one occurs earlier), and when the required performance has occurred. With the latter, income is included for the tax year when its amount of income can be accurately determined.

To find out the costs of goods sold, businesses have to value their inventory at the beginning and the end date of every tax year. The cost of goods sold should be deducted from the company's gross receipts to come up with its annual gross profit. Some expenses included in figuring the cost include: direct labor costs (e.g. contributions to annuity plans and pensions) for workers involved in the production process; the cost of raw materials or products, together with freight; storage; and factory overhead. In compliance with the uniform capitalization rules, direct costs and some of the indirect costs for resale activities and production must be capitalized. Indirect costs include: purchasing, storage, taxes, interest, rent, processing, handling, repacking, and administrative costs. This rule does not hold for personal property that is acquired for the purpose of resale if one's gross receipts per annum, for 3 consecutive tax years, are less than $10 million.

Under the US tax code, buying gas to fuel assets, such as a business car, is considered an expense whereas the actual car is not. This is because it is a business-related asset and as such, it also represents a capital expense. Costs that prolong or improve the life of such assets are not considered expenses and are not tax-deductible. Gas will only allow the car to run. Expenses also include costs that reduce taxable income.