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:
- The cost best matches the related revenues
- The cost is used up or expires
- 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.
