This asset, however, would be charged as an expense over the term of its useful life through depreciation and amortization. Examples of expenses include rent, utilities, wages, salaries, maintenance, depreciation, insurance, and the cost of goods sold. Expenses are usually recurring payments needed to operate a business.

Understanding the distinction can help managers to better control the operating expenses while considering the timeframe. Accrued expenses are transactions a company needs to pay, such as rent or mortgages, but has not yet paid. For example, if a company receives a shipment of raw materials used for production, but the supplier hasn’t yet sent an invoice for the transaction, the amount owed is an accrued expense. Under cash accounting, the expense is only recorded when the actual cash has been paid. While expenditure is the payment or the incurrence of a liability, expenses represent the consumption of an asset. For example, your company has made an expenditure of $10,000 in cash to purchase a fixed asset.

Understanding Cost Accounting

When a company accrues (accumulates) expenses, its portion of unpaid bills also accumulates. There are a number of reasons why you need to track your expenses in an account in business. At the end of the year, Corey spends a total of $5,200 on deli meat and lists this as an expense on his income statement. Expenses are deducted from revenues to arrive at the company’s net income. The salary costs of the engineer and technicians is considered a revenue expenditure. It’s important to understand the difference between an expenditure and an expense.

  • Variable expenses, however, are those which directly depend on how much a company is selling.
  • By IRS standards, a deductible business expense must be both ordinary (typical for the business’s industry) and necessary (helpful for the business’s functions).
  • Anyone in a business or organization can make expenses, but accountants and finance teams are responsible for tracking and reporting these transactions.
  • This can help you avoid any purchases that you may regret making later on.
  • However, to make money you have to spend money, or so the old saying goes.

Deferred revenue expenditure, or deferred expense, refer to an advance payment for goods or services. The arrangement is usually an agreement that the company will receive a service or goods in the future – but it pays for the goods or services in advance. Expenses are recorded in the books on the basis of the accounting system chosen by the business, either through an accrual basis or a cash basis. Under the accrual method, the expense for the good or service is recorded when the legal obligation is complete; that is when the goods have been received or the service has been performed. What also needs to be noted is that while all expenses that your business will incur cannot be tax-deductible expenses, some would be.

What Are Examples of Expenses?

Most, but not all, expenses are deductible from a company’s income (revenues) to arrive at its taxable income. The most common tax-deductible expenses include depreciation and amortization, rent, salaries, benefits, and wages, marketing, advertising, and promotion. Because the company actually incurred 12 months’ worth of salary expenses, an adjusting journal entry is recorded at the end of the accounting period for the last month’s expense.


The IRS has guidelines related to how businesses must capitalize assets, and there are different classes for different types of assets. It typically relates to recurring expenses such as rent, interest payments, insurance payments, and bank fees. Cost accounting is an informal set of flexible tools that a company’s managers can use to estimate how well the business is running.

Accounting for Expenses

The key difference between direct expenses and indirect expenses in accounting is that direct expenses are traceable. They are limited to a single department and are for the purpose of that department only. Indirect expenses, on the other hand, are untraceable as they are not linked to any particular division of a business. Direct expenses and indirect expenses are different terms used to describe a business’s expenditure. They are distinguishable in order to retain accuracy in financial reports.

Finding the right balance can be difficult but can yield significant rewards. Cost accounting is helpful because it can identify where a company is spending its money, how much it earns, and where money is being lost. Cost accounting aims to report, analyze, and lead to the improvement of internal cost controls and efficiency.

Liabilities are unpaid expenses that you owe to businesses, employees, or other entities. That way, you can observe which expenses you spend the most on, better track your money, and stay organized. Before we get into what is an expense account, you need to familiarize yourself with the different types of expenses. The expense accounting noted here is used in an accrual basis accounting system. Corey’s Food Truck, Inc. is a local food company that delivers sandwiches on the Santa Monica beach.