What Is an Expense?
An expense is a cost a business incurs in the course of earning revenue — the money spent on operations, from salaries and rent to materials and utilities. Expenses are recorded on the income statement and reduce net income.
What an expense is and why it matters
Expenses are the costs of doing business, and matching them to the revenue they help generate is a core principle of accrual accounting. They fall into broad groups: cost of goods sold (directly tied to what's produced), operating expenses (rent, salaries, marketing), and non-operating items (interest, taxes). Distinguishing an expense from a capital expenditure matters — an expense is consumed within the period, while a capital outlay creates a long-lived asset that's depreciated over time. Controlling expenses is one of the two levers, alongside revenue, that drives profitability.
A worked example
In March, a business incurs the following: $30,000 in salaries, $5,000 rent, $2,000 utilities, and $8,000 in materials used. Total expenses are $45,000. If March revenue was $70,000, net income is $70,000 − $45,000 = $25,000. Note that a $20,000 machine bought in March is not an expense — it's a capital asset, expensed gradually through depreciation, so only that period's depreciation portion hits March's income statement.
How firms handle it today
Firms capture expenses from bills, receipts, and bank feeds, code each to the right account in the chart of accounts, and confirm classification at close so the income statement is accurate.
Related terms
- Operating expenses
- COGS
- Income statement
- Accrued expense
- Overhead
FAQ
What's the difference between an expense and a capital expenditure?
An expense is consumed within the period; a capital expenditure buys a long-lived asset that's depreciated over several periods.
Where do expenses appear?
On the income statement, where they're subtracted from revenue to arrive at net income.
What are the main types of expenses?
Cost of goods sold, operating expenses (like rent and salaries), and non-operating expenses (like interest and taxes).