Expenses refer to costs incurred in conducting business. Technically, expenses are "decreases in economic benefits during the accounting period in the form of decreases in assets or increases in liabilities that result in decreases in equity, other than those relating to distributions to equity participants".
In a Nutshell
Expenses refer to costs incurred by a company in conducting business. Examples are:
Cost of sales
Bank Service Charges
Repairs and Maintenance
Salaries and Wages
License Fees and Taxes
Utilities Expense, etc.
From the technical definition of expense, we can draw the following points:
- Decrease in benefits during the accounting period - Expenses are measured from period to period, and results in a decrease in economic benefits.
- Decrease in assets or increase in liabilities - The decrease in economic benefits mentioned above could be in the form of a decrease in assets or an increase in liabilities. When a company incurs an expense, it pays cash; thereby decreasing assets. Besides cash, the company may also use other assets in paying expenses. It may also incur in a liability in cases of accrued expenses (unpaid expenses).
- Decrease in equity, other than distributions to equity participants - There are only two elements that decrease equity: distributions to owners (i.e., withdrawals or dividends) and expenses.
List of Expense Accounts
- 1. Cost of Sales - also known as Cost of Goods Sold, it represents the value of the items sold to customers before any mark-up. In merchandising companies, cost of sales is normally the purchase price of the goods sold, including incidental costs. In manufacturing businesses, it is the total production cost of the units sold. Service companies do not have cost of sales.
- Purchases - cost of merchandise acquired that are to be sold in the normal course of business. At the end of the period, this account is closed to Cost of Sales.
- Freight in - If the business shoulders the cost of transporting the goods it purchased, such cost is recorded as Freight-in. This account is also closed to Cost of Sales at the end of the period.
- 2. Advertising Expense - costs of promoting the business such as those incurred in newspaper publications, television and radio broadcasts, billboards, flyers, etc.
- 3. Bank Service Charge - costs charged by banks for the use of their services
- 4. Delivery Expense - represents cost of gas, oil, courier fees, and other costs incurred by the business in transporting the goods sold to the customers. Delivery expense is also known as Freight-out.
- 5. Depreciation Expense - refers to the portion of the cost of fixed assets (property, plant, and equipment) used for the operations of the period reported
- 6. Insurance Expense - insurance premiums paid or payable to an insurance company who accepts to guarantee the business against losses from a specified event
- 7. Interest Expense - cost of borrowing money
- 8. Rent Expense - cost paid or to be paid to a lessor for the right to use a commercial property such as an office space, a storeroom, a building, etc.
- 9. Repairs and Maintenance - cost of repairing and servicing certain assets such as building facilities, machinery, and equipment
- 10. Representation Expense - entertainment costs for customers, employees and owners. It is often coupled with traveling, hence the account title Travel and Representation Expense.
- 11. Salaries Expense - compensation to employees for their services to the company
- 12. Supplies Expense - cost of supplies (ball pens, ink, paper, spare parts, etc.) used by the business. Specific accounts may be in place such as Office Supplies Expense, Store Supplies Expense, and Service Supplies Expense.
- 13. License Fees and Taxes - business taxes, registration, and licensing fees paid to the government
- 14. Telecommunications Expense - cost of using communication and telephony technologies such as mobile phones, land lines, and internet
- 15. Training and Development - costs for the enhancement of employee skills
- 16. Utilities Expense - water and electricity costs paid or payable to utility companies
And others, such as Accounting or Bookkeeping Fees, Legal and Attorney Fees, etc. Expenses are deducted from revenues to arrive at the company's net income.