Expense


Expense
Expenses redirects here. For the row about members' expenses in the UK Parliament which started about May 2009, see United Kingdom Parliamentary expenses scandal.
Accountancy
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In common usage, an expense or 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

...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.[1]

Contents

Bookkeeping for expenses

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.

Cash flow

In a cash flow statement, expenditures are divided into operating, investing, and financing expenditures.

An important issue in accounting is 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. These latter types of expenditures are reported as expenses when they are depreciated by businesses that use accrual-basis accounting, which is most large businesses and all C corporations.

The most common interpretation of whether an expense is of capital or income variety depends upon its term. Viewing an expense as a purchase helps alleviate this distinction. If, soon after the "purchase", that which was expensed holds no value then it is usually identified as an expense. If it retains value soon and long after the purchase, it will be viewed as capital with life that should be amortized/depreciated and retained on the Balance Sheet.

Deduction of business expenses under the United States tax code

For tax purposes, the Internal Revenue Code permits the deduction of business expenses in the taxable year in which those expenses are paid or incurred. This is in contrast to capital expenditures[2] 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.[3]

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).

Section 162(a) of the Internal Revenue Code is the deduction provision for business or trade expenses. In order to be a trade or business expense and qualify for a deduction, it must satisfy 5 elements in addition to qualifying as an expense. It must be (1) ordinary and (2) necessary (Welch v. Helvering, 290 U.S. 111, defines this as necessary for the development of the business at least in that they were appropriate and helpful). Expenses paid to preserve one’s reputation do not appear to qualify (Welch v. Helvering). In addition, it must be (3) paid or incurred during the taxable year. It must be paid (4) in carrying on (meaning not prior to the start of a business or in creating it) (5) a trade or business activity. To qualify as a trade or business activity, it must be continuous and regular, and profit must be the primary motive.

Section 212 of the Internal Revenue Code is the deduction provision for investment expenses. In addition to being an expense and satisfying elements 1-4 above, expenses are deductible as an investment activity under Section 212 of the Internal Revenue Code if they are (1) for the production or collection of income, (2) for the management, conservation, or maintenance of property held for the production of income, or (3) in connection with the determination, collection, or refund of any tax.

In investing, one controversy that mounted throughout 2002 and 2003 was whether companies should report the granting of stock options to employees as an expense on the income statement, or should not report this at all in the income statement, which is what had previously been the norm.

Expense Report

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.

See also

References

  1. ^ IFRS Framework, F.70
  2. ^ Capital expenditures must recovered over a period of years through depreciation and amortization. See also Expenses versus Capital Expenditures
  3. ^ For more on this subject, see Donaldson, Samuel A., Federal Income Taxation of Individuals: Cases, Problems and Materials 170-73 (2d ed. 2007).

External links


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Synonyms:

Look at other dictionaries:

  • expense — ex‧pense [ɪkˈspens] noun 1. [countable, uncountable] ACCOUNTING an amount of money that a business or organization has to spend on something: • Most advertisers look upon advertising as an expense and not an investment, which is a mistake. • The… …   Financial and business terms

  • expense — ex·pense 1 n: financial burden or outlay; specif: an item of business outlay chargeable against revenue for a specific period busi·ness expense: an expense made in furtherance of one s business esp. as part of the cost of operating a business in… …   Law dictionary

  • Expense — Ex*pense , n. [L. expensa (sc. pecunia), or expensum, fr. expensus, p. p. of expendere. See {Expend}.] 1. A spending or consuming; disbursement; expenditure. [1913 Webster] Husband nature s riches from expense. Shak. [1913 Webster] 2. That which… …   The Collaborative International Dictionary of English

  • expense — [ek spens′, ikspens′] n. [ME < Anglo Fr < LL expensa (pecunia), paid out (money) < L expensum, neut. pp. of expendere: see EXPEND] 1. Obs. the act of expending; a spending or using up 2. financial cost; fee; charge 3. any cost or… …   English World dictionary

  • expense — late 14c., from Anglo Fr. expense, O.Fr. espense money provided for expenses, from L.L. expensa disbursement, outlay, expense, prop. neut. pl. pp. of L. expendere to weigh out money, to pay down (see EXPEND (Cf. expend)). The verb is 1909, from… …   Etymology dictionary

  • expense — ► NOUN 1) the cost incurred in or required for something. 2) (expenses) specific costs incurred in the performance of a job or task. 3) something on which money must be spent. ● at the expense of Cf. ↑at the expense of …   English terms dictionary

  • expense — cost, *price, charge …   New Dictionary of Synonyms

  • expense — [n] cost, payment amount, assessment, bite*, bottom line*, budget, charge, consumption, debit, debt, decrement, deprivation, disbursement, duty, expenditure, forfeit, forfeiture, insurance, investment, liability, loan, loss, mortgage, obligation …   New thesaurus

  • expense — noun 1 cost/money spent on sth ADJECTIVE ▪ considerable, enormous, great, huge, significant, vast ▪ added, additional, extra …   Collocations dictionary

  • expense — ex|pense [ ık spens ] noun *** 1. ) count an amount of money you spend in order to buy or do something: Rent is our biggest expense. You can claim part of your telephone bill as a business expense. traveling/medical/legal expenses a factory s… …   Usage of the words and phrases in modern English


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