What is an expense?

Definition of Expense

Under the accrual method of accounting, an expense is a cost that is reported on the income statement for the period in which:

  1. The cost best matches the related revenues
  2. The cost is used up or expires
  3. There is uncertainty or difficulty in measuring the future benefit of the cost

Examples of Expense

Some of the expenses that will be reported on a retailer's income statement for the month of August include:

  • Cost of goods sold for the August sales. (The date that the retailer had paid for the goods is not pertinent.)
  • Commissions earned by the sales staff for having sold the goods in August (even if the commissions are paid in September)
  • Cost of the electricity used in August (even if the bill is received in September and is paid in October)
  • August rent for the store
  • Wages that employees earned in August
  • Advertising that took place in August

Expenses are often divided into two major classifications:

  • Operating expenses which involve a company's main activities. A retailer's operating expenses include the cost of goods sold and its selling, general and administrative expenses. Inside the company, these will likely be sorted by department, product line, and so on.
  • Nonoperating expenses which pertain to a company's incidental activities. A common nonoperating expense for a retailer is interest expense.

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