Accounting terms

Dictionary of all accounting terms

What is an Expense?

An expense is any money that is spent or costs that are incurred as a business, individual or organization attempts to generate revenue.

Expenses are always tied to the greater goal of a business, entrepreneur or freelancer, or organization in its daily operations attempting to earn revenue. Because of this attempt, businesses are allowed to write off tax-deductible expenses when they do their income tax returns. This helps to lower their taxable income, thereby decreasing their tax liability.

Types of expenses

The most common business expenses include:

  • employee wages
  • payments to vendors or suppliers
  • equipment rental or depreciation
  • factory leases
  • travel and entertainment, etc.

The types of deductions that businesses can write off may be different depending on the country. For example, the US Internal Revenue Service (IRS) has very strict rules on what can or cannot be claimed as a deduction.

The IRS states that any business expense has to be both ordinary and necessary. This means that it

  • has to be normal and common for the particular industry
  • helps the business earn money

Any expenses that fall out of these conditions may raise the suspicions of the IRS.

Recording expenses

In order to record expenses, accountants can either use the cash basis or the accrual basis of accounting. Cash basis defines an accounting style where expenses are recorded when they are paid out. The accrual basis works by recording the expenses when they are occurred but before they are paid out.

For example, under the cash basis, if a business owner schedules for window washing, expenses will only be recorded when the invoice is paid. Under the accrual method, the expense is recorded when the service is completed.

You can download a free expense budget spreadsheet template here!

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