What Are Expenses in Accounting? (2024)

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Definition of expenses in accounting

An expense in accounting refers to the money spent and the costs incurred by a company in pursuing revenue. Simply put, account expenses are the costs involved in running a business, and collectively they contribute to the activities involved in generating profit.

While they might seem identical in general lexicon, there is an important difference between a “cost” and an “expense” when it comes to accounting.

Cost refers to the finances put forward in order to purchase an asset. The use and consumption of these assets are expenses.

So, while an example of a cost might be the purchase of a van by a company, the payment for petrol and servicing are expenses.

It follows, therefore, that all expenses can be categorised as costs, but not all costs are necessarily expenses.

All expenses will be recorded and noted in a business’s income statement. The total revenue minus expenses determines the net profit of a company.

Direct expenses vs. indirect expenses in accounting

A question new business owners often ask is: what are direct expenses in accounting?

Direct expenses and indirect expenses are different terms used to describe a business’s expenditure. They are distinguishable in order to retain accuracy in financial reports.

The key difference between direct expenses and indirect expenses in accounting is that direct expenses are traceable. They are limited to a single department and are for the purpose of that department only. Indirect expenses, on the other hand, are untraceable as they are not linked to any particular division of a business.

Usually, direct expenses are linked to the manufacturing of a product, for example, the cost of raw materials. Direct expenses therefore fluctuate according to the rate of production, but should be consistent for each unit of production.

Indirect expenses are confined to office expenditures, such as rent, utilities and employee salaries.

Categories of business expenses

Beyond direct and indirect expenses, there are a number of other ways to categorise expenses which you need to be aware of. These include the following:

Operating vs. non-operating expenses

Operating expenses refer to expenditure relating to the principal activities of your business, such as the cost of the materials used to make a product you sell.

Non-operating expenses, meanwhile, are those not directly related to the operations involved in business. This might be the interest on a business loan, for example.

Fixed vs. variable expenses

Fixed expenses do not depend on the number of units you sell. For example, rent, which will remain the same no matter the activity level of your business.

Variable expenses, however, are those which directly depend on how much a company is selling. For example, employee wages which may increase should they be required to work more hours.

Deductible vs. non-deductible expenses

Deductible expenses are expenses which a business can deduct from its income before taxation. Non-deductible expenses are ones which cannot be subtracted from income.

What is an expense account?

An expense account helps you oversee and organise the various expenses of your business over a certain duration of time.

You can break this down into sub-accounts so that you can clearly see where money is going and organise your finances accordingly.

Employees may have access to an expense account in order to pay for expenditures related to business. This may include, for example, reimbursing an employee who spent money on dinner with a client.

Expense accounts are temporary. You therefore need to close expense accounts and reset them at the beginning of a new period.

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As a payment scheme technology expert with a focus on various global payment schemes such as UK Direct Debit, the European SEPA scheme, and the US ACH scheme, I can confidently provide insights into the concepts used in the article about expenses in accounting by GoCardless. My expertise lies in understanding payment technologies, operating rules, and financial systems across different regions.

The GoCardless content team, composed of subject-matter experts from various departments like sales, marketing, legal, and finance, possesses in-depth knowledge and experience in payment scheme technology. The team's expertise extends to established payment schemes like UK Direct Debit, European SEPA, US ACH, as well as schemes in Scandinavia, Australia, and New Zealand.

Now, let's delve into the concepts mentioned in the article:

Definition of Expenses in Accounting:
- Expenses in accounting refer to the money spent and costs incurred by a company in pursuit of revenue.
- Account expenses are the costs involved in running a business, contributing to activities that generate profit.
Cost vs. Expense:
- Cost refers to the finances invested in purchasing an asset.
- Expenses involve the use and consumption of assets acquired. For example, the purchase of a van is a cost, while payments for petrol and servicing are expenses.
Direct Expenses vs. Indirect Expenses:
- Direct expenses are traceable to a single department and are specific to that department's purpose.
- Indirect expenses are untraceable and not linked to any particular division of a business.
- Direct expenses are often associated with manufacturing (e.g., raw material costs), while indirect expenses are office-related (e.g., rent, utilities, salaries).
Categories of Business Expenses:
- Operating vs. Non-operating Expenses: Operating expenses relate to the principal activities of the business, while non-operating expenses are unrelated to core business operations (e.g., interest on a business loan).
- Fixed vs. Variable Expenses: Fixed expenses remain constant regardless of units sold (e.g., rent), while variable expenses depend on sales volume (e.g., employee wages).
- Deductible vs. Non-deductible Expenses: Deductible expenses can be subtracted from income before taxation, while non-deductible expenses cannot.
Expense Account:
- An expense account helps oversee and organize business expenses over a specific period.
- It can be broken down into sub-accounts to track expenditures.
- Expense accounts are temporary and should be closed and reset at the beginning of a new period.

In conclusion, understanding these concepts is crucial for small businesses and enterprises alike to manage their finances effectively, reduce costs, and improve overall financial health. If you have any specific questions or need further clarification on these concepts, feel free to ask.