What are Expenses?

What are Expenses?

Expenses refer to the sum of money spent on the day to day activities of the business in its routine course of operations to generate income in the business such as the cost incurred on the purchase of goods and services so that the final sale of good & rendering of service can be done to generate revenue for the business and the benefits of such expenses are enjoyed in the same accounting year in which they are incurred.

Explanation with Example

Expenses of the business are the cost incurred on purchase of any product or on receipt of any service. Expenses are required to run any business as you cannot generate revenue without incurring expenses. Even if your business only requires a Laptop or desktop still some expenses like electricity expenses,  repairs & maintenance expenses, office expenses, marketing expenses are required.

In the normal business of manufacturing or trading of goods the main expenses include expenses purchase of raw material, purchase of finished goods, salary expenses, promotion & marketing expense etc. These expenses provide benefits in a single accounting year and not in the long run.

For example:  A company dealing with manufacturing & sale of clothes spent money on the items mentioned below:

ParticularsAmount ($)
Purchase of raw fabric500
Wages paid to labors20
Power & fuel40
Salary paid to office staff50
Printing & stationery expenses5
Purchase of Furniture90
Marketing Expense40
Purchase of Machinery150
Conveyance Expenses100

Now we need to calculate total expense of the company.

Solution:

The total expenses of the company are as follows:

ParticularsAmount ($)
Purchase of raw fabric500
Wages paid to labors20
Power & fuel40
Salary paid to office staff50
Printing & stationery expenses5
Marketing Expense40
Conveyance Expenses100
TOTAL EXPENSES755

Since the purchase of furniture and machinery provide benefits for long duration (more than a year), they are not expense instead they are expenditure and all the other cost incurred are the expense of the company. Therefore, total expenses are $755.

Features of Expenses:

  1. Expenses are important to conduct the day to day affairs of the business as without incurring expenses it is not possible to run a business. For example to run a manufacturing concern of Shirts, purchase of fabric is most important. Therefore for the existence of business these key expenses are mandatory.
  2. The expenses of the business are recurring in nature i.e. they are not one time expense rather amount is spent regularly or periodically.
  3. Expenses are shown in the profit & loss account and to calculate the earnings of the business total expenses of the business are deducted from the total revenue/income.

Final thought:

Thus, expenses refer to the outflow of money from the business to pay for the day to day activities of business. The expenses are important to generate revenue and profits of the company. For individual school fees, Consultancy fees etc. are all expenses but in broader sense for a business expenses includes purchases, salary expense, legal expenses, sales promotion expenses etc. but the amount of money spent on fixed assets as the benefit of expense lasts within a year but investment in fixed assets give returns for a longer duration.

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Related Articles

  1. What are Assets?
  2. What are Liabilities?

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