Expense - What is an expense?
An expense is defined as an outflow of money or assets to another individual or company as payment for an item or service
Stay on top of your expenses by registering them quickly and easily from anywhere with Debitoor accounting software. Try it free for 7 days.
An expense is the costs experienced by a company, paid out to suppliers or for products or services from other sources. Within a business context, only expenses that relate the the cost of business operations should be included in the company’s records.
As one of the main aspects of running a business, managing expenses is a crucial part of keeping tabs of your company’s financial health. Expenses ultimately mean money that is spent in order to continue and grow the operations of a business.
Technically speaking, an expense is an event where an asset is used up or a liability is incurred. With regards to the accounting equation, expenses effectively reduce owner's equity.
Types of Expenses
There are possibly an infinite number of expenses depending on the nature and size of the business. However there are expenses that are common to almost all businesses, these being:
- Rent expenses Involve the rent paid on properties or space that is used for business purposes.
- Wage expenses This refers to any amount of money paid out to employees of a business.
- Interest expenses Involve the amounts owed on any interest due for small business loans, for example.
While it might seem tedious to keep track of these each and every month, for example, it is a necessary part of managing the financial side of your business. Thankfully, today it can be done quickly and easily with accounting software.
Recording an expense
Expenses are recorded on the debit side of an expense account (which is an income statement account) and a credit is recorded to either a liability or an asset account in accordance with double-entry bookkeeping.
When the expense is recorded on the profit & loss report is dependent upon the accounting method chosen by a business. Under the accrual method of accounting, an expense is recorded when it is incurred by a business (which might differ from when cash actually changes hand).
For example: A business pays for internet service in their offices monthly but receives and pays the bill the following month. However, they will record the rent for the month the cost was incurred even though payment was made the following month under accrual accounting.
Registering an expense under the cash accounting method, on the other hand, means that each expense is recorded only when money actually changes hands.
For example: A business pays for electricity quarterly, and receives the bill at the end of each quarter. Although the period covers several months, the amount is only entered into the record at the end of each quarter when the bill is paid.
Expenses you can claim
As a freelancer or small business owner, you can claim certain expenses against tax. As of 2016/17, the personal allowance in the UK is £11,000. This means that you can offset up to this amount to lower your tax payments.
Allowable expenses include but are not limited to the following:
- Cost of office supplies such as paper, pens, ink toner, etc.
- Travel costs such as mileage, as long as it is specifically for business operations
- Costs of running your office, including electricity, internet, heating, etc.
- Marketing and advertising fees
- Supplies purchased for resale, such as raw materials
To read more about what you can claim, take a look at our blogpost: ‘10 things you should be claiming as a freelancer’.
Adding expenses in Debitoor
In Debitoor, we’ve made it simple to register and view your expenses. Add an expenses from anywhere, at any time by using our iPhone or Android mobile app. All it takes is to snap a photo and our OCR (Optical Character Recognition) reads the date and amount data so you need only add a few details to save it to your account.
Our useful expense graphs on your home dashboard as well as under expenses, provide you with a visual overview of your expenses for certain periods. Additionally, you also have the option of viewing financial reports for your business, all with just a click.