What Is an Expense?

What Is an Expense?

By Charles Joseph | Editor, Financial Affairs
Reviewed by Corey Michael | Senior Financial Analyst

An expense is an outflow of money, or any form of fortune in general 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 an expense. With businesses, expenses can be anything considered necessary to maintain and run the operation, from product production costs to the salaries of employees.

Related Questions

1. What are fixed expenses?

Fixed expenses are costs that remain essentially the same over time. These are bills that you must pay regularly, regardless of how much or how little you use the services. Common fixed expenses include rent or mortgage payments, car payments, and insurance premiums.

2. What is the difference between an expense and a liability?

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Liabilities are financial obligations or debts that a business has incurred during its operations, like loans or accounts payable. Expenses, on the other hand, are the costs incurred during the regular business operations, like utilities or employees’ salaries.

3. How does an expense affect a company’s profit?

Expenses directly impact a company’s profit. The higher the expenses, the lower the profit, and vice versa. When a company increases its expenses on productive efforts, its revenue should increase, resulting in higher profits. But if the costs rise without a corresponding increase in revenue, profit may decrease.

4. What are operational expenses?

Operational expenses are costs associated with the day-to-day operations of a business, such as rent, utilities, office supplies, and employee wages. These costs are necessary for the business to function and are subtracted from revenues to calculate the operating profit of the business.

5. How is an expense recorded in accounting?

In accounting, an expense is recorded when a business uses goods or services to generate income. It is logged as a debit to an expense account and a credit to either an asset or a liability account, depending on the nature of the transaction.