Expense: Definition & Overview
As an entrepreneur, you know that keeping track of your actual expenses is important. What exactly counts as an expense? How do you keep track of them all? Expenses are defined as costs that are incurred to generate revenue.Ā
There are three types of expenses that will be discussed. These include fixed, variable, and period. Every business has different actual expenses. There are some common examples of business expenses that will be covered. It is important to remember that not all expenditures are considered allowable expenses.
This article covers everything you need to know about expenses. Some topics include what an expense is, if expenses can be a good thing, and much more.
Table of Contents
KEY TAKEAWAYS
- Expenses are costs that a business incurs to generate revenue.
- Expenditures are costs associated with running a business, but not all of them are considered actual expenses.
- Business income is money received by a company as a result of its operations.
- Expenses can be considered a good thing for a business for tax purposes.
What are Expenses in Business?
An expense is a cost of operation that is incurred to generate revenue. It can be divided into three categories: fixed, variable, and period. All businesses have different actual expenses. Expenses are important to track and understand to stay profitable.
Fixed Expenses
Fixed expenses are costs that do not change regardless of the amount of revenue generated. They are usually monthly costs, such as rent or a phone bill. Fixed expenses help businesses maintain a certain level of operations each month.
Fixed expenses are important for businesses to track because they are a major component of total costs. It is important to make sure that these expenses remain in check, so the business can stay profitable.
Here are some common examples of fixed expenses:
- Rent or cost of lodging
- Utilities
- Phone bill
- Internet bill
Variable Expenses
Variable expenses are costs that change depending on the amount of revenue generated. They can be either monthly or yearly expenses. An example of a variable expense would be the cost of goods sold. As the company sells more products, the cost of goods sold increases.
Variable expenses are important for businesses to track because they can have a major impact on profits. It is important to make sure that these expenses are monitored. Expenses can increase rapidly. Meaning businesses can become significantly more or less profitable with minor adjustments. Especially when it comes to these costs per unit.
Here are some common expenses that can be categorized as variables:
- Cost of goods sold
- Cost of equipment
- Shipping and handling
- Freight costs
Period Expenses
Period expenses are those that are incurred once and not on a monthly or yearly basis. An example would be an advertising campaign that runs for six months. The cost of the campaign is generally paid once and then complete. The company would only pay again if they decide to purchase again at some point.
Businesses need to track period expenses because they can have a large impact on total profits. They are one-time costs and can be easy to forget about.
Here are some common examples of period expenses:
- Advertising campaign
- Consulting fees
- Website design
What is the Difference Between Expenses and Expenditures?
While both terms refer to costs incurred to generate revenue, there is a slight difference between the two terms. An expenditure is any cost that is associated with running a business. This can be anything from the cost of goods sold to employee salaries.
An expense, on the other hand, is typically for those costs that are related to generating revenue. For example, if a company spends money on advertising, this would be an expense. However, if they purchase new office furniture, this would be an expenditure.
It is important to note that not all expenditures are considered actual expenses in this case. Only those costs that are directly related to revenue generation are considered part of the expenses.
What is the Difference between Expenses and Income?
Expenses are costs incurred in the course of doing business. Income, on the other hand, is money that is received by a company as a result of its operations.
One way to think about it is that expenses are negative income and positive income. When expenses exceed income, the company experiences a loss. Conversely, when income exceeds expenses, the company experiences a profit.
Can Expenses Be Considered a Good Thing for a Business?
Yes, expenses can be considered a good thing for a business. In fact, it is not possible to have aĀ business without expenses.
While many people view expenses as a bad thing, they are actually necessary for any business to survive. Expenses are what allow businesses to pay for the goods and services they need to generate revenue.
Expenses can also help ease your tax burden. Business expenses reduce business income, which results in lower business taxable income. Businesses can also deduct certain expenses from their taxable income via a tax credit. Utilizing a tax credit reduces the amount of tax they have to pay.
What is a Taxable Expense?
A taxable expense is an expense that can be deducted from a company’s taxable income. This deductible expense reduces the amount of tax the company has to pay.
Many different types of expenses can be considered taxable. From smaller out-of-pocket expenses to larger ones. Some common examples include:
- Employee salaries
- Business travel
- Office supplies
- Interest payments
- Wifi
- Cell phone service
- Vehicle expenses – including out-of-pocket expenses such as the cost of gas and oil
Summary
As a small business owner, itās vital that you understand the importance of your expenses. Itās key that you keep track of your outgoing expenses to not overspend and put the financial health of your company at risk. By properly balancing your business income to your expenses, you can ensure that your businessās finances are well managed.
FAQs on Expenses
There are many ways to track your actual expenses. Spreadsheets and accounting software are two of the most popular options.
No, you cannot write off your personal expenses. Only business expenses can be counted as a business deduction from taxable income.
No, not all expenditures are considered actual expenses. Only those costs that are directly related to generating revenue are included in the expenses.
Marketing expenses are additional costs. They are associated with promoting and advertising a product or service. These can include things like advertising campaigns, consulting fees, and website design.
An operating expense is a cost of operation that is incurred in the course of running a business. This can include things like employee salaries, rent, and utilities.
A non-operating expense is a cost that comes from non-core day-to-day business activities. This might include interest payments and one-time actual expenses.
Share: