What is an Expense? | Accounting Student Guide

An Expense represents a cost incurred in the making of revenue. Examples of Expenses are Rent, Insurance, cost of goods, and payroll. An expense is also used to record the reduction of value of an Asset. For example, Depreciation Expense is used to record the reduction in value of an Asset like a deliver van. An expense has a normal debit balance. Expenses are listed on the Income Statement.

What are Some Examples of Expenses?

This table shows a list of common expenses businesses use to track the costs associated with creating revenue.

Rent Expense	Telephone Expense
Supplies Expense	Wages & Salaries Expense
Delivery Expense	Advertising Expense
Commission Expense	Depreciation Expense
Amortization Expense	Interest Expense
Bad Debt Expense	Payroll Tax Expense
Marketing Expense	Utilities Expense
Materials Expense	Cost of Goods Sold
Cost of Merchandise Sold	Freight in / Freight Out
Income Tax Expense	Sales Tax Expense

What are the Types of Expenses?

Expenses are divided into groups (classifications) depending on their use:

• Operating Expenses
• Non-operating Expenses

Operating Expenses are those costs related to the main activity of the business. Examples of Operating Expenses are Rent Expense, Cost of Goods Sold, and Wages & Salaries Expense.

Non-operating Expenses are those cost not related to the main activity of the business. Examples of Non-operating Expenses may include Interest Expense and expenses from a one-time sale of an assets.

How are Expenses Listed on the Income Statement?

In general, Expenses are grouped together on the Income Statement below the revenue section. The simplest form of the Income Statement, the single-step Income Statement, lists all expense accounts together.

Further classification of Expenses can be done on a multi-step Income Statement. Like Expenses are grouped together. For example, all expenses (cost of goods) related to the making or delivering of a product or service are grouped together. The same can be done with Selling Expenses and Administrative Expenses. Non-operating expenses are grouped together below the Revenue and Expenses from Operations.

Here is an example of a single-step Income Statement:

Revenue	10,000
Expenses:
Rent Expense	1,500
Telephone Expense	500
Insurance Expense	1,000
Total Expenses	3,000
Net Income	7,000

Here is an example of a multi-step Income Statement

Revenue	10,000
Cost of Goods Sold	5,000
Gross Profit	5,000
Expenses:
Rent Expense	1,500
Telephone Expense	500
Insurance Expense	1,000
Total Expenses	3,000
Net Income	2,000

Here is an example of the multi-step Income Statement for Apple:

When is an Expense Recognized or Considered to be Incurred?

When an expense is recorded is based on the accounting method a company uses, cash basis or accrual basis. Under the Cash Basis method, an expense is only incurred (recorded on the Income Statement) when cash is paid out. Under the Accrual Basis method, an expense is recognized (recorded on the Income Statement) when the services are delivered or the goods are delivered, regardless of when cash is received.

For businesses required to follow U.S. Generally Accepted Accounting Principles (GAAP), the Accrual Basis of accounting is required.

For more information about GAAP, watch this video:

https://youtu.be/qVyb_9i8FZc

What is the Difference Cash Basis and Accrual Basis?

Under Cash Basis of accounting, revenue is considered to be earned (included in revenue on the income statement) when cash is received. Expenses are considered to be incurred (included in expenses on the income statement) when cash is paid out.

Under Accrual Basis of accounting, revenue is considered to be earned (included in revenue on the income statement) at the time the work is completed or the goods are delivered, regardless of when cash is received. Expenses are considered to be incurred (included in expenses on the income statement) when the services are received or goods are received, regardless of when cash is paid out.

For more information about Cash Basis vs Accrual Basis, watch this video:

https://youtu.be/-xPWl5OfknU

What is the difference between Accrued Expense and Deferred Expense?

Accrued Expense represents expenses incurred but not yet paid for. An example of Accrued Expense is a purchase from a vendor on account. The expense is recorded in the current month and tracked using Accounts Payable. The portion of the expense incurred in the current month is included in expenses, but the cash will be paid out in a later month.

Deferred Expense represents payments made prior to the work being done or the goods being delivered. The cash payment is recorded to a deferred or prepaid revenue account (an Asset) until it is used up, at which time it will be moved from the asset account to the related expense account. An example of a deferred expense is Prepaid Insurance.

For more information about Prepaid Expenses, read this article:

What Does Prepaid Mean in Accounting?

Chart of Accounts Listing of Typical Expenses

For more information about expenses are recorded, check out this article:

What is an Income Statement or Profit & Loss?