An expense is a cost incurred by a business or individual in the process of generating revenue or simply operating. It represents a decrease in economic benefit during an Accounting Services Buffalo period.
An expense is a cost incurred in order to generate revenue. Essentially, it is money spent or liabilities incurred by a person or business to get something. This financial outflow is recorded on an income statement and acts to reduce a company’s profit or a person’s disposable income.
A simple and universal example of an expense is rent.
For an individual or household: Your monthly payment to a landlord for the use of your apartment or house is a personal living expense. It is a necessary cost to maintain your housing.
For a business: The regular payment made to lease office space, a warehouse, or a retail store is a business expense. This cost is necessary for the company’s daily operations (running the business) and is deducted from revenue to calculate profit.
Personal Expense Examples
These are the costs an individual or household incurs to maintain their daily life and standard of living:
Housing Costs:
Rent or Mortgage payments (the prime example).
Utilities (electricity, water, gas, internet, cell phone service).
Property Taxes and Homeowner’s/Renter’s Insurance.
Food and Groceries: Money spent on daily essentials and dining out.
Transportation: Costs like gas/fuel, car payments, public transit fares, vehicle insurance, and maintenance/repairs.
Personal Care & Health: Healthcare premiums, medications, dental care, haircuts, and toiletries.
Debt Repayments: Interest payments on loans (student, personal, credit card interest).
Discretionary Costs: Entertainment (streaming subscriptions, movie tickets), hobbies, and travel.
The most common and clear example of an expense is Rent Expense.
Example: Rent Expense
The monthly rent paid for a business’s office space, factory, or storefront is a perfect illustration of an expense.
Why Rent is an Expense
Cost of Operations: The business needs the physical space to operate, employ staff, and produce/sell goods or services. Paying rent is an ordinary and necessary cost of doing business.
Short-Term Benefit: The benefit (the right to use the space) is consumed entirely within the current accounting period (usually one month). Once the month is over, the benefit is gone, and a new payment is due for the next period.
Appears on the Income Statement: The rent amount is recorded on the company’s Income Statement (Profit & Loss Statement) to be subtracted from revenue, which then determines the net income (profit) for the period.
Other Common Business Expense Examples
Expenses are generally broken down into categories depending on their nature and how they relate to the business’s main activity.
1. Operating Expenses (OpEx)
These are the costs associated with the day-to-day running and administration of the business:
Salaries and Wages Expense: Payments made to employees for their work.
Utilities Expense: Costs for electricity, water, internet, and gas.
Advertising and Marketing Expense: Money spent on commercials, social media campaigns, and print ads.
Office Supplies Expense: Cost of paper, pens, printer ink, and minor items consumed quickly.
2. Cost of Goods Sold (COGS)
For businesses that sell products (like manufacturers or retailers), this is the direct cost of the items sold:
Raw Materials: The cost of components used to manufacture a finished product.
Direct Labor: Wages paid to employees who physically assemble or create the product.
3. Non-Cash Expenses
Some expenses are recorded even though no cash leaves the bank in that period, adhering to the Accrual Basis of Accounting:
Depreciation Expense: The systematic allocation of the cost of a long-term asset (like a piece of machinery or a vehicle) over its useful life. This is recognized because the asset’s value is being “used up” over time to generate revenue.
Business Expense Examples
For a business, an expense is a cost directly related to the operation and administration of the company:
Operating Expenses: Costs necessary for the day-to-day running of the business.
Salaries and Wages paid to employees.
Rent for office, retail, or warehouse space.
Office Supplies (paper, ink, stationery).
Marketing and Advertising costs.
Utility Bills for the business premises.
Depreciation (the expense recognized for the reduction in value of assets like machinery or vehicles over time).
Cost of Goods Sold (COGS): Direct costs of producing the goods or services a company sells.
Raw Materials and direct labor for manufacturing.
Non-Operating Expenses: Costs not directly tied to core business activities.
Interest Expense paid on business loans.
Losses from the sale of an asset.
The opposite of an expense is an Asset (a resource owned by the company that provides future economic benefit, like a building) or a Capital Expenditure (CapEx), Bookkeeping and Accounting Services Buffalo in a long-term asset that will be used for multiple years.
