What Are Expenses In Accounting?

##IMAGE_HERE##Expenditure is an outflow of money to another person or group to pay for an item or service, or for a category of costs. For a tenant, rent is an expense. For students or parents, tuition is an expense. Buying food, clothing, furniture or an automobile is often referred to as an expense. An expense is a cost that is “paid” or “remitted”, usually in exchange for something of value. Something that seems to cost a great deal is “expensive”. Something that seems to cost little is “inexpensive”. “Expenses of the table” are expenses of dining, refreshments, a feast, etc.

In accounting, expense has a very specific meaning. It is an outflow of cash or other valuable assets from a person or company to another person or company. This outflow of cash is generally one side of a trade for products or services that have equal or better current or future value to the buyer than to the seller. Technically, an expense is an event in which an asset is used up or a liability is incurred. In terms of the accounting equation, expenses reduce owners’ equity. The International Accounting Standards Board defines expenses as:.mw-parser-output .templatequote{overflow:hidden;margin:1em 0;padding:0 40px}.mw-parser-output .templatequote .templatequotecite{line-height:1.5em;text-align:left;padding-left:1.6em;margin-top:0}

…decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants

Expenditure is the amount of resource consumed.Usually it is of long term in nature.Therefore its benefits is derived over a period ehich extended beyond the accounting year.Expenditure is classfied into capital expenditure and revenue expenditure .

In double-entry bookkeeping, expenses are recorded as a debit to an expense account (an income statement account) and a credit to either an asset account or a liability account, which are balance sheet accounts. An expense decreases assets or increases liabilities. Typical business expenses include salaries, utilities, depreciation of capital assets, and interest expense for loans. The purchase of a capital asset such as a building or equipment is not an expense.

In a cash flow statement (flow of funds statement), expenditures are divided into three categories:

Whether a particular expenditure is classified as an expense, which is reported immediately on the business’s income statement or whether it is classified as a capital expenditure (or an expenditure subject to depreciation) which is not an expense flow of funds statement. Though, these latter types of expenditures are reported as expenses when they are depreciated by businesses that use accrual-basis accounting- as most large businesses and all C corporations do.

Defining an expense as capital or income using the most common interpretation depends upon its term.

When an expense is seen as a purchase it alleviates this distinction. Soon after the purchase, (that which was expenses holds no value), then it is usually identified as an expense. It will be viewed as capital with life that should be amortized/depreciated and retained on the balance sheet if it retains value soon and long after the purchase.

For tax purposes, HM Revenue & Customs permits the deduction of business expenses in the tax payable year in which those expenses are paid or incurred. This is in contrast to capital expenditures that are paid or incurred to acquire an asset. Expenses are costs that do not acquire, improve, or prolong the life of an asset. For example, a person who buys a new truck for a business would be making a capital expenditure because they have acquired a new business-related asset. This cost could not be deducted in the current taxable year. However, the gas the person buys during that year to fuel that truck would be considered a deductible expense. The cost of purchasing gas does not improve or prolong the life of the truck but simply allows the truck to run.

Even if something qualifies as an expense, it is not necessarily deductible. As a general rule, expenses are deductible if they relate to a taxpayer’s trade or business activity or if the expense is paid or incurred in the production or collection of income from an activity that does not rise to the level of a trade or business (investment activity).

An expense report is a form of document that contains all the expenses that an individual has incurred as a result of the business operation. For example, if the owner of a business travels to another location for a meeting, the cost of travel, the meals, and all other expenses that he/she has incurred may be added to the expense report. Consequently, these expenses will be considered business expenses and are tax deductible.

Many businesses benefit from automated expense reports systems for expense management. Depending on the system chosen, these software solutions can reduce time costs, errors, and fraud.

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