What are Accounting Expenses: Types and Examples (2024)

18 July, 2024

10 mins

Clarity and understanding of accounting expenses are important for businesses, as they impact their financial health and influence the decision-making process. Whether it is a small business or a large corporation, accurately classifying and recording different types of expenses is essential to ensuring financial statement accuracy.

In this blog, we will see what expenses are, how they are recorded, and the various types of expenses, along with an example for better understanding. We will also understand what the difference is between expenses and expenditures.

An expense refers to the cost incurred by a business in the process of generating revenue. It represents an outflow of cash or cash equivalents to ensure smooth business operations. Expenses are an essential part of producing goods, delivering services, and maintaining overall functionality.

Expenses form an integral part of an income statement, as they are subtracted from revenues to realize the net profit or loss for a particular period. Businesses compute this to arrive at an estimate for their operational efficiency and profitability.

Some examples of expenses are salaries, rent, utilities, supplies, depreciation, and marketing expenses, which are normally categorized under different headings according to their nature and time factor. They are categorized into accrued expenses, fixed expenses, non-operating expenses, operating expenses, prepaid expenses, and variable expenses.

Understanding the different types of business expenses is vital for effective financial management. Below, we discuss various categories of expenses that businesses commonly encounter:

Accrued expenses

Accrued expenses represent liabilities incurred by a business but not yet paid for. These expenses are recognized in the accounting period in which they occur, aligning with the accrual basis of accounting, which matches revenues with the expenses incurred to generate them. They are recorded as liabilities.

Common examples include accrued salaries that employees have worked for and thus earned but have not yet been paid, interest on loans that has accrued and accumulated but has not yet been paid, and utilities consumed but not yet billed.

Accrued expenses are recognized as liabilities in the books of the company. In that way, all obligations are included in the financial position of a company, even if they have not been settled with cash yet. Accrued expenses let a business present a more realistic and full picture of their respective financial health, thereby enabling better planning and making financial decisions.

Fixed expenses

Fixed costs are those costs that do not change with the level of business activity or the volume of production. Most of these costs are regular, predictable, and not influenced by short-term changes in sales or operations. Examples may include rent, salaries of permanent employees, insurance premiums paid, and the depreciation of any equipment.

It is easier to predict and budget for fixed expenses because they do not fluctuate with business activity. On the other hand, they also represent a continuous financial commitment, payment for which has to be made irrespective of the financial performance of the company. Effective management and control of fixed expenses are central to the maintenance of stability in finance, particularly during the lean periods that come with reduced revenues.

Non-operating expenses

Non-operating expenses refer to the expenditures that are not directly related to activities constituting a company’s core business. These expenses stem from the secondary activities of a business and not from its primary operations, and are recorded separately from operating expenses.

Examples of common non-operating expenses include interest expenses that a company bears because of an acquired loan, losses incurred from the sale of assets, and restructuring charges.

Most of the time, non-operating expenses are presented separately from operating expenses in a company’s income statement in order to bring out its level of operational efficiency. Business enterprises distinguish between operating and non-operating expenses in order to help them assess core profitability for strategic decision-making.

Operating expenses

Operating expenses are costs directly related to the daily activities of the company. They are the costs incurred to keep up regular business operations so as to offer products or services to customers. Their examples include wages, utilities, rent, office supplies, and advertising.

Operating expenses are costs a firm incurs in carrying on its daily activities. t They are deducted from gross revenue to obtain operating profit. In this respect, managing operating expenses is crucial for a firm’s profitability. Monitoring and controlling those costs can enhance operational efficiency and improve financial performance.

Prepaid expenses

Prepaid expenses represent advance payments for goods or services that would be received or consumed in future periods. The items are first recorded as assets on the balance sheet from an accounting point of view since they involve acquiring future economic benefits. Once these prepaid goods or services are consumed or used up, the prepaid amount gets gradually expensed on the income statement. Examples include prepaid rent, insurance premiums, and subscriptions.

Proper management of prepaid expenses ensures matching a company’s expenses against the accounting periods that receive their associated benefits. It gives a true picture of the organization in terms of financial performance and timely expense recognition.

Variable expenses

Variable expenses are those business costs that vary with the level of activities or volume of production. Examples of variable costs include raw materials, commission payments, and freight-forwarding charges.

Variable expenses are linked to the business activities of a company generating revenues; hence, they are relatively less predictable compared to fixed expenses. On the other hand, owing to flexibility, variable expenses can be reduced based on performance, which helps in the management of business profitability. In this regard, sufficient tracking and control of variable expenses are important for responding to changes in business conditions and maintaining financial stability.

Under accrual accounting, expenses are recognized in the books of a company when they are incurred, irrespective of whether an actual cash transaction has occurred. This means that the expenses will be recorded in general ledger accounts assigned to them as they occur and accounted for to present a true picture of the financial state of the firm. Recording of the incurred expenses assists in proper compliance with accounting standards and is important in making sound financial analysis and reporting.

Here’s a step-by-step guide to how expenses are typically recorded in accounting:

Identify the expense:

• Determine the nature of the expense and ensure it is a legitimate business cost.
• Categorize the expense as either operating or non-operating, fixed or variable, etc.

Document the expense:

• Gather all relevant documentation, such as invoices, receipts, or bills.
• Ensure the documentation includes key details like the date, amount, and purpose of the expense.

Record in the general ledger:

• Enter the expense details into the general ledger under the appropriate account category.
• Use accounting software to streamline this process and ensure accuracy.

Apply the accrual basis:

• Record the expense in the period it is incurred, regardless of when the payment is made.
• This approach adheres to the matching principle of accounting and ensures that the expenses match with the revenue they help generate, providing a more accurate financial picture.

Review and reconcile:

• Regularly review recorded expenses for accuracy and completeness.
• Reconcile recorded expenses with bank statements and financial reports to ensure consistency and identify any discrepancies.

All businesses deal with various types of expenses.. From everyday operational expenses to other one-time or occasional non-recurring charges that firms might bear, they are all part of expenses in accounting. Familiarity with common expense examples will help you forecast and budget expenses for your company more precisely, ensuring financial well-being. Let’s go over some of them:

• Rent: Monthly payments for office or warehouse space.
• Utilities: Costs for electricity, water, and internet services.
• Salaries and Wages: Compensation paid to employees.
• Office Supplies: Costs for items such as paper, pens, and printer ink.
• Advertising: Expenses for marketing and promotional activities.
• Travel: Costs associated with business travel, including airfare and lodging.
• Depreciation: Depreciating entities like vehicles, machinery, office equipment, buildings.
• Inventory: Costs of raw materials, finishes goods, merchandise etc.
• Taxes: Taxes like income tax, property taxes, sales taxes etc.
• Training and development: Costs for workshop, seminars, online courses, certifications.

Source

The Hershey Company’s financial statement for the year ending December 31, 2023, highlights two key expense categories: Selling, Marketing, and Administrative Expenses, and Business Realignment Costs.

Selling, Marketing, and Administrative Expenses

The Selling, Marketing, and Administrative (SMA) expenses, amounting to $2,436,508 thousand, encompass all the costs related to promoting, selling, and managing the company’s products. This broad category includes expenses such as salaries and commissions for the sales team, marketing campaign costs (advertising, promotions, and digital marketing), travel and entertainment expenses for business development, and general administrative costs (office supplies, administrative salaries, and utility expenses). These expenses are critical for maintaining and growing the company’s market presence, supporting customer relationships, and ensuring efficient operational management. By investing in these areas, Hershey aims to drive sales growth, enhance brand recognition, and streamline its internal processes.

Business Realignment Costs

The Business Realignment Costs, totaling $441,000 thousand, represent expenses associated with strategic restructuring efforts. These costs may include severance packages for laid-off employees, costs related to closing or consolidating facilities, and fees for consultants or legal services to manage the restructuring process. Realignment efforts are typically undertaken to improve operational efficiency, reduce costs, or better align the company’s structure with its strategic goals. Although these costs can be substantial in the short term, they are aimed at achieving long-term benefits such as improved profitability, streamlined operations, and a stronger competitive position.

While often used interchangeably, expenses and expenditures have distinct meanings in accounting. Expenses refer to the costs incurred in the process of earning revenue and are recorded on the income statement. Expenditures, on the other hand, are broader and include any outflow of money for acquiring assets or settling liabilities. Expenditures can be capital in nature, such as purchasing equipment, or revenue in nature, like paying for utilities.

• Expense Example: Monthly rent payment for office space. This is recorded as an expense because it is a recurring cost necessary for maintaining business operations.
• Expenditure Example: Purchasing a new piece of machinery for the production line. This is recorded as an expenditure because it is a significant outlay of cash intended to benefit the business over multiple periods.

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Is salary considered an expense?

Yes, salary is an expense. In fact, it forms part of operating expenses because it is what is paid by the company to employees as remuneration for their work. Salaries appear on the income statement in the period incurred and thus form part of the net profit or loss the business is going to realize.

How to figure out expenses in accounting?

Accumulate all expenses through the collection of receipts, invoices, and bills. Categorize these costs into relevant expense accounts, such as utilities, rent, and salaries. Record each expense in the accounting software or ledgers; at the same time, follow up on each with complete accuracy and clarity in its report.

When are expenses recognized in accrual accounting?

In accrual accounting, costs are recognized as they are incurred, independent of when the actual payment is made. It simply means that expenses are recorded during the accounting period relevant to it and matched with revenues to which they relate, providing an accurate financial picture.

How do you calculate expenses in accounting?

Expenses are calculated by adding up the costs incurred over a specified period. These will include fixed expenses such as rent and salaries and variable ones like materials and commissions, among others. Proper documentation and identification of each cost should lead to an accurate return for the expense calculation.

How many types of expenses are there in accounting?

Accounting mainly consists of accrued, fixed, non-operating, operating, prepaid, and variable expenses. Each classification describes different types of costs incurred by a business in the course of its operations and financial activities, and each of these categories has a unique nature affecting different accounts.