Expenses are money spent on the operations of a business to generate revenue. Expenses include payroll, equipment depreciation, materials cost, rent, etc. Some of these expenses can be included in tax deductibles to lessen the tax liabilities.
Expenses are recorded in two ways, one is cash basis accounting and another is accrual basis accounting. In cash basis accounting, expenses are recorded only after they are paid out. While in accrual basis accounting, they’re recorded soon after the invoice is generated even though the money is yet to be transferred.
Expenses can be classified into two categories, they are:
- Operating: These are costs incurred during operations. These include payroll, rent, Cost of Goods Sold, costs spent on marketing and sales.
- Non-operating: These are costs that are not directly associated with operations. These include loan interests, taxes, lawsuits settlements, depreciation, etc.