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Expenses

In business, expenses are the costs incurred in order to produce revenue.

Expanded Definition

Intuitively, everyone knows what expenses are. They are the costs of doing business, whether it is cost of goods sold, interest, or depreciation. These are the costs that are deducted from revenue to derive net income.

Expenses can be divided up into two types: operating and non-operating. All operating expenses, those that are needed to run the business such as salaries, paying the electric bill, research & development, buying inventory, are subtracted from revenue directly or from gross profit. Non-operating expenses are things like changes in accounting policies, writedown of obsolete inventory, and losses on sales of investments. These appear on the income statement below the line showing operating profit.

Many expenses are grouped together. For instance, salaries of management, utility bills, rent on office space, and advertising are usually grouped as part of the selling, general, & administrative expense line item on the income statement.

Expenses can also be divided into cash and non-cash expenses. Cash expenses are any that require payment of cash during the current period or relatively quickly. These include advertising, rent, utilities, salaries and wages, inventory purchases, etc. Stuff that you wold write a check for if they were in your household budget.

Non-cash expenses come about from the rules of following Generally Accepted Accounting Procedures (GAAP) and from the timing difference between when cash is actually spent and when the expense is recorded. Depreciation is one of these, where the asset is purchased at some point in time, showing up in the investing portion of the cash flow statement, but the cost of that asset is spread across the useful lifetime of the asset and expensed over time, as the asset is used to generate revenue. Other non-cash expenses include inventory writedowns.


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