How does an expense affect the balance sheet?

Definition of Expense

An expense is a cost that has been used up, expired, or is directly related to the earning of revenues.

Most of a company's expenses fall into the following categories:

  • cost of goods sold
  • sales, general and administrative expenses
  • interest expense

How an Expense Affects the Balance Sheet

An expense will decrease a corporation's retained earnings (which is part of stockholders' equity) or will decrease a sole proprietor's capital account (which is part of owner's equity).

In addition to affecting retained earnings or the owner's capital account, an expense will also cause one or more of the following changes to the balance sheet: