A type of expenditure that flows through the income statement and is deducted from revenue to arrive at net income
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What is an Expense?
Businesses incur various types of expenses. An expense is a type of expenditure that flows through the income statement and is deducted from revenue to arrive at net income. Due to the accrual principle in accounting, expenses are recognized when they are incurred, not necessarily when they are paid for.
Types of Expenses
As the diagram above illustrates, there are several types of expenses. The most common way to categorize them is into operating vs. non-operating and fixed vs. variable.
- Operating
- Non-operating
- Interest
- Taxes
- Impairment charges
- Fixed
- Rent
- Salaries, benefits,and wages (sometimes fixed and sometimes variable)
- Variable
- Transaction fees
- Commissions
- Marketing and advertising (sometimes fixed and sometimes variable)
Expenses vs Capital Expenditures
The only difference between an expense and a capital expenditure is that an expense has been recognized under the accrual principle and is reflected on the income statement, whereas a capital expenditure goes straight to the balance sheet as an asset.
Once a capital expenditure goes on the balance sheet as an asset, it can be expensed later as depreciation and amortization, which flows through the income statement.
The statement of cash flows is where the actual timing of cash payments for all expenditures will be reflected. To learn more, check out CFI’s free tutorial on how to link the three financial statements in Excel.
Expenses Example – Amazon
Below is an example of Amazon’s 2017 income statement (statement of operation) which lists their main categories of expense. As you can see, Amazon separates its costs into two categories.
Operating expenses consist of the cost of sales, fulfillment, marketing, technology and content, general and administrative, and others.
Non-operating expenses comprise interest expense (and income), and other expenses (income). Finally, Amazon has charged a provision for income taxes and accounted for equity method investment activity.
To learn more, check out CFI’s Free Accounting Courses.
Tax Deductible Types of Expenses
Most, but not all, expenses are deductible from a company’s income (revenues) to arrive at its taxable income. The most common tax-deductible expenses include depreciation and amortization, rent, salaries, benefits, and wages, marketing, advertising, and promotion.
Items that are not tax-deductible vary by region and country. It’s important to consult a professional tax advisor to learn about what expenses are deductible and not deductible in your or your company’s situation.
Additional Resources
Thank you for reading CFI’s explanation of Types of Expenses. To keep learning and advancing your career, the following CFI resources will be helpful:
FAQs
An expense is a cost that businesses incur in running their operations. Expenses include wages, salaries, maintenance, rent, and depreciation. Expenses are deducted from revenue to arrive at profits. Businesses are allowed to deduct certain expenses from taxes to help alleviate the tax burden and bulk up profits.
How do you solve for expenses? ›
Total Expenses = Net Revenue - Net Income.
What is the 50 20 30 rule? ›
Key Takeaways. The 50-30-20 budget rule states that you should spend up to 50% of your after-tax income on needs and obligations that you must have or must do. The remaining half should dedicate 20% to savings, leaving 30% to be spent on things you want but don't necessarily need.
What is the expenses rule? ›
The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals.
What are examples of expenses? ›
Examples include groceries, utilities, entertainment expenses and travel. Variable expenses can be more challenging to predict, but you can average out the total cost of these expenses for the year and allocate that total across 12 months.
How do you explain expenses? ›
In accounting, an expense refers to any cost that contributes to a company's overall cost of doing business. That is, any costs incurred as a result of a company's attempted or successful revenue production. Expenses may include cash, cash equivalents, and depreciation.
How do you simplify expenses? ›
11 Ways to Simplify Your Financial Life
- Consolidate Bank Accounts and Retirement Accounts. ...
- Get Rid of as Much Paperwork as You Can. ...
- Cut Back to Just One Credit Card. ...
- Become Debt Free. ...
- Invest in Funds Rather than Individual Stocks. ...
- Pay Cash Whenever Possible. ...
- Cut Out Any Services You Don't Need or Regularly Use.
Monthly expenses list. According to the same 2022 BLS study, the average American's monthly expenses are $6,080, 1 which is about 77% of the average monthly income before taxes. This list of expenses covers everything from housing, health insurance and food to entertainment, personal care products and books.
Why pay yourself first? ›
By paying yourself before others, you are building the habits and discipline it takes to gain peace of mind with an emergency fund, save for large purchases and trips, and invest for long-term wealth building.
How much should rent be of income? ›
Generally, experts recommend spending no more than 30% of monthly pre-tax income on housing. However, it's not always that simple. According to the U.S. Census Bureau, between 2017 and 2021, over 40% of renter households (19 million) spent more than 30% of their income on rent.
making $4,000 a month using the 75 10 15 method. 75% goes towards your needs, so use $3,000 towards housing bills, transport, and groceries. 10% goes towards want. So $400 to spend on dining out, entertainment, and hobbies.
Can you live on $1000 a month after bills? ›
Getting by on $1,000 a month may not be easy, especially when inflation seems to make everything more expensive. But it is possible to live well even on a small amount of money. Surviving on $1,000 a month requires careful budgeting, prioritizing essential expenses, and finding ways to save money.
What is the $2500 expense rule? ›
The De Minimis Safe Harbor is an annual tax election that business owners and real estate investors can make when they file their returns. The election allows you to automatically expense any item under $2,500 on your invoice.
What is the golden rule of expenditure? ›
What Is the Golden Rule of Government Spending? The golden rule of government spending is a fiscal policy that a government should borrow only to invest, not to fund current spending. In other words, the government should borrow money only to make investments that will produce long-term benefits for the future.
What is expenses in your own words? ›
Expense is the money that something costs you or that you need to spend in order to do something. He's bought a big TV at vast expense so that everyone can see properly. Expenses are amounts of money that you spend while doing something in the course of your work, which will be paid back to you afterwards.
What does any expenses mean? ›
a. : financial burden or outlay : cost. built the monument at their own expense. b. : an item of business outlay chargeable against revenue for a specific period.
What is the meaning of expenses in a sentence? ›
He received a daily allowance to cover his travel expenses, including meals, while away from home on business. Expenses are amounts of money that you spend while doing something in the course of your work, which will be paid back to you afterwards by an employer or be allowable against tax.
Does expense mean cost? ›
What is an expense? While a cost is generally a one-time payment, an expense is best described as an amount paid regularly towards ongoing business operations. These payments are important to a company's ability to generate revenues.
