Expenses in Accounting- Definition, Types, & Examples

Expenses in Accounting- Definition, Types, & Examples

Expenses" was first used in 1892 by John Maynard Keynes, who wrote about his income and expenditure in his book A Treatise on Money. 

Keynes argued that "expenditure" should not be confused with "income", and he defined "expense" as "the amount paid out by an individual for goods or services". 

In economics, an expense is any cost incurred by a person or organization to obtain something they want or need.

What is expenses in Accounting

Expenses meaning in accounting, differ from expenses in economics. "Expenses, meaning in Accounting", refers to any cost incurred by a business entity. These costs may include employee salaries, rent payments, advertising, utilities, etc. 

In addition to these costs, businesses incur many other types of costs throughout the course of their operations. 

These costs are called "overhead" costs. Overhead costs are not directly related to sales and therefore do not affect profit margins.  

Types of Expenses in Accounting

There are two major types of expenses in accounting. Fixed and variable expenses. 

A fixed expense is an expense that remains constant throughout the year. An example would be rent. Rent is always the same regardless if it's the month of the year.

On the other hand, a variable expense is an expense that changes depending on the time of the year. 

An example is electricity bills. Electricity bills change seasonally based on how many hours are being used. 

  1. Fixed Expenses – One of the types of expenses in accounting is fixed expenses. 

These are costs that do not vary over time. These are rent/mortgage payments, insurance premiums, taxes, utilities, etc. 

  1. Variable Expenses - These are expenses that directly relate to the amount of revenue generated. Examples of these are labour rates, advertising, marketing, inventory, fuel, etc. 

The best way to handle these expenses is to separate them. You want to pay these expenses before they become income. 

If you wait until profits are made, you may pay twice, once in cash and again on your tax return.

There are three basic categories of expenses:

1. Operating expenses- Operating expenses are those expenses associated with running a business. 

Operating expenses include payroll, insurance premiums, office supplies, rent, utilities, etc. Operating expenses are the most important type of expense. 

Operating expenses are the only expenses that directly relate to the profitability of a business. 

If a company spends $100 per employee but makes $200 per employee, then it is clear that the business is losing money. 

However, if a company spends $500 per employee, but makes only $600 per employee, then it seems that the business is making money. This is because the company is spending less than its revenues.

2. Non-operating expenses- non-operating expenses are those expenses that have nothing to do with running a business. 

These expenses include legal fees, taxes, loan interest, depreciation, repairs, maintenance, etc. 

Non-operating expenses are the second most important type of expense because they indirectly affect the profitability of a business by increasing overhead costs.

A company that pays Rs. 15,000 in taxes each year will pay more in taxes than it does in profits. Therefore, it is obvious that paying taxes is a bad thing. 

However, a company that spends Rs. 25,000 on advertising each year will spend more than it earns, even though it is still profitable. 

Advertising increases the demand for products, thereby increasing sales. Thus, advertising is good for the bottom line.  

3. Capital expenses- Capital expenses are those expenses that are necessary to start a business. 

Examples of capital expenses would include purchasing equipment, inventory, land, etc. 

Capital expenses are the least important type of expense because while they are necessary to start a company, they do not directly affect the profitability of a company. 

Companies often use capital expenditures to increase productivity. For example, a company might purchase a new piece of machinery to increase production.  

How Do You Calculate Expenses in accounting?

To calculate expenses in accounting, simply add all the direct costs associated with running a business and then subtract them from the total revenue generated by the business. 

Direct costs are those costs that cannot be broken down further. Revenue is calculated by adding together all of the gross sales (the amount of money received from customers) and dividing it by the number of units sold. 

Gross sales minus direct costs equal net income. Net income is what remains after overhead costs have been subtracted from revenue.

There are many types of other expenses in accounting in India. Given below are examples of expenses in accounting, some of the most common include: 

  1. Cost of goods sold: This is the cost of the raw materials and other costs incurred in manufacturing or producing the goods that are sold by the business. 
  2. Selling and marketing expenses: These are the costs incurred in promoting and selling the products or services of the business. 
  3. Administrative expenses: These are the costs incurred in the administrative and general management of the business. 
  4. Financing expenses: These are the costs incurred in raising capital for the business, such as interest on loans.
  5. Depreciation: Depreciation is the method of charging off the value of an asset over time. When an asset is no longer useful, it has lost its value. 

An example of expenses in accounting would be if you buy a car after 6 months, you decide to sell it. 

You could charge the buyer the cost of the car plus a percentage, which is called depreciation. A company might use depreciation to account for their investment in equipment.

  1. Interest: Interest is charged on loans. In accounting, interest is charged at a certain rate per year. For example, if you borrow Rs. 1000 for 1 year, then you pay Rs. 100 in interest.
  2. Taxes: Taxes are charges levied on the income of individuals or companies by governments. Income tax is a tax paid to the government based on how much money is earned. Companies have to pay taxes on any profit they make. Individual taxpayers are taxed based on their total earnings.
  3. Amortization: Amortization is the act of writing down the value of assets over time. If you own a house, you might want to write down the house's value each month.

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FAQS:

  • Who is the person who calculates the accounting expenses?

Generally, the accountant of a company calculates the accounting expenses.

  • How to calculate accounting expenses?

You can calculate accounting expenses by subtracting the total expenses from the total amount of revenue. 

  • What should an expense account contain?

Your expense account should contain balances for each sub-account and a total expense balance.

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