Expenses

Expenses

A business incurs various costs in the process of earning revenue. These costs are called expenses. The fundamental idea is that expenses are the price of generating income — without spending on certain items, the business cannot operate or sell its goods/services.

Expenses are measured by the cost of assets consumed or services used during an accounting period. For example, when a business uses electricity to run its machines, the electricity bill is an expense. When a building is used for a year, a portion of its cost (depreciation) becomes an expense.

Common Items of Expenses

The usual items that appear as expenses in most businesses include:

• Depreciation — the gradual reduction in the value of fixed assets (like machinery, furniture, buildings) due to use or obsolescence.
• Rent — payment for the use of premises owned by someone else.
• Wages — payments made to workers directly involved in production or operations.
• Salaries — payments made to administrative and managerial staff.
• Interest — cost of borrowing money (on loans, overdrafts, etc.).
• Cost of heat, light, and water — utility expenses for running the business.
• Telephone expenses — charges for communication services.

Accounting Treatment of Expenses

When an expense is incurred, the accounting entry follows the Nominal Account rule:

Debit all expenses and losses, Credit all incomes and gains.

So, for any expense:

Why? The expense account is debited because it represents a loss or consumption of value to the business. The credit is given to the asset (cash/bank) if paid immediately, or to a liability (outstanding expense) if payment is due later.

Key Distinction: Expense vs. Asset …