In accounting, what are expenses?
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Accounting · Foundations
Expenses
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An expense The cost of resources used up to earn revenue, recorded in the period the cost is incurred. Full entry → is the cost of resources a business uses up to earn revenue: the flour baked into today's bread, the rent for this month's shop space. Expenses are recorded when they are incurred, matched to the revenue they help create, and they reduce the owners' equity The owners' stake in the business: assets minus liabilities. Full entry →. Rent, wages, materials, utilities, and marketing are everyday examples. Controlling expenses means deciding what spending earns its keep.
Why this matters
Expenses decide whether a business keeps going. Revenue is the money coming in, but expenses are what it costs to bring that money in, and the gap between the two is profit or loss. Owners, managers, and lenders all watch expenses closely: a business can raise plenty of revenue and still fail if its costs run out of control. Understanding expenses also changes how you read everyday financial news and how you run a budget A spending plan that sets targets in advance so a business can compare actual results against them. Full entry → of your own. The habit of asking what spending buys, and whether it is worth it, is the same whether the budget is a company's or a household's.
The college version
What an expense is
OpenStax's Principles of Accounting defines expenses as the cost of resources associated with earning revenues. A business does not spend money just to spend it; it spends to get something done — to make a product, serve a customer, or keep the doors open. The resources are used up in the effort: the flour in the bread, the hours of the staff, the electricity that runs the ovens. Two features matter. First, an expense is tied to the period in which the cost is incurred, not necessarily the period in which cash changes hands. That timing rule is the expense recognition principle The accounting rule that matches expenses with the revenue they help produce. Full entry → — accountants match expenses with the revenue they helped produce, which is why CFI notes that expenses are recognized when they are incurred rather than when they are paid. Second, expenses reduce what the owners have: every expense recorded takes something away from the bottom line.
Expenses versus assets: used up now, or kept for later
The clearest way to see what an expense is, is to see what it is not. When a business buys something that will be used up in earning revenue within a short period — coffee beans that will be brewed and sold this week — that cost is an expense. When a business buys something that will keep serving it for years — the espresso machine itself — the purchase is not an expense of the day it is bought. It is an asset A resource a business owns that will provide value in a later period, such as equipment or inventory. Full entry →, a resource for later, and its cost is spread over the years it works. CFI draws exactly this line: an expense flows to the income statement, while a capital expenditure goes on the balance sheet as an asset and is expensed later, a piece at a time, as depreciation. An original example: a food truck owner buys $60 of fuel for tonight's service and a $6,000 oven that will bake for years. The fuel is an expense tonight. The oven is an asset; only a slice of its cost becomes an expense each year it is used.
The everyday types of expenses
Most businesses face the same five categories. Rent: the cost of the space the business uses — a bookstore pays $2,400 a month for its street-level shop. Wages: pay for the people doing the work — a cafe's two baristas earn $15 an hour. Materials: the goods and ingredients that go into what is sold — a bakery's flour, sugar, and butter are its cost of goods sold The direct cost of the materials and goods that were sold to customers. Full entry →. Utilities: electricity, water, and internet that keep the operation running — a greenhouse's winter heating bill. Marketing: money spent to reach customers — a dog-walking service buys $300 of social ads before the busy season. OpenStax lists utility bills and employee salaries among everyday examples, and CFI groups rent, wages, marketing, and the cost of goods sold under operating expenses The day-to-day costs of running the business, such as rent, wages, utilities, and marketing. Full entry →. None of these categories is glamorous, but together they are the machinery of earning.
Expenses in the accounting equation, and expenses versus liabilities
The accounting equation says assets equal liabilities plus equity. Equity is the owners' stake, and expenses act on that stake directly: OpenStax's expanded accounting equation shows that an increase in expenses decreases retained earnings The part of equity built up from profits the business kept rather than paid out. Full entry →, which is part of equity. Mechanically, every expense shaves a little off what the owners would otherwise keep. That is why profit is not revenue; it is what remains after expenses have done their work. Expenses also need to be told apart from liabilities, a separate idea with its own lesson. An expense is a cost incurred — it belongs to this period's income statement. A liability An amount a business owes to another party, such as an unpaid bill or a loan. Full entry → is an amount owed — it belongs to the balance sheet. The two often appear together: when a shop receives this month's electric bill but has not paid it yet, the electricity is an expense (the cost was incurred) and the unpaid bill is a liability (an amount owed). One event, two accounting labels, two different meanings.
Controlling expenses: decisions, not just cuts
Controlling expenses does not mean spending as little as possible. It means spending deliberately, so every dollar has a job. CFI describes budgeting as the tactical implementation of a business plan: a budget sets targets in advance, and the business compares actual spending against them and adjusts along the way. A restaurant that raises menu prices to pay for better ingredients has not cut anything — it has decided that the higher expense earns its keep. A startup that hires a second salesperson before the first one has filled her quota has made a different decision, and the budget is where that decision shows up. The honest framing is that expenses are the price of earning. No business earns revenue without spending something to get it. The question is never whether there are expenses, but whether each expense buys more than it costs.
Eli explains
The same idea, in plain words
Explain it like I’m 10
An expense is what a business spends that gets used up while it earns money. Think of a lemonade stand: the lemons, sugar, and cups are used up the day you sell the drinks, so they are expenses. The pitcher you will use all summer is not an expense yet — it is something you own, and only a little bit of its cost counts as an expense each time you use it. Expenses are recorded when the cost is actually incurred, not just when you hand over cash. If you buy cups on credit, the cups are still an expense the day you use them, and the unpaid bill is a separate thing: money you owe. Every expense shrinks what the business keeps, which is why profit is revenue minus expenses.
Picture it like this
Running a business is like cooking dinner for paying guests. The ingredients you use up in tonight's meal — the chicken, the rice, the spices — are expenses: gone once the meal is served. The pots, pans, and oven you will use for years are assets: they stay with you and serve many meals. And a guest who has not paid yet is neither — that is money owed to you, a different category entirely.
Where the picture stops working
The kitchen analogy blurs at the edges. Some ingredients, like a bag of rice, last several meals, and a business must decide whether such a purchase is used up now or spread over time. And unlike a home cook, a business records expenses when they are incurred under accrual accounting — a bill counts the moment the cost is created, even if the cash payment comes later.
Worked example
Sofia runs a bicycle repair shop. In March she earns $9,400 in repair and sales revenue. Her expenses for the month: $1,800 rent for the shop, $2,900 in wages for her mechanic and herself, $1,600 for parts and supplies used in repairs, $420 for electricity and internet, and $310 on a neighborhood ad campaign — $7,030 in total. Her profit is $9,400 minus $7,030, or $2,370. The equation tells the same story: the $7,030 of expenses reduced her equity, the revenue increased it, and the $2,370 left over is what her equity grew by. Note what is not in the list: the $5,500 bike repair stand she bought in February is an asset, not a March expense.
Key takeaway
Expenses are the price of earning: the resources used up to bring in revenue, recorded when incurred, and always reducing what the owners keep. The skill is not avoiding expenses but deciding which ones earn their keep.
Quick check
3 questions here, of 5 in this lesson’s practice set. Answers stay hidden until you check.
When a business records an expense, what happens to the owners' equity?
Choose an answer, then check it.
A bakery buys flour, bakes it into bread, and sells all of the bread today. How should the cost of the flour be recorded?
Choose an answer, then check it.
Study tools & related lessonsYou’ll learn to · Common mistakes · Easily confused · Key vocabulary · Related
You’ll learn to
- Define an expense using the working definition: the cost of resources used up to earn revenue.
- Distinguish an expense from an asset by whether the resource is used up now or kept for later.
- Name the common types of expenses — rent, wages, materials, utilities, and marketing — and give an example of each.
- Explain how expenses reduce owners' equity through the accounting equation.
- Distinguish expenses from liabilities: costs incurred versus amounts owed.
- Apply budgeting thinking to judge whether a spending decision is worth its cost.
Common mistakes
Confusing expenses with cash payments.
An expense is recorded when the cost is incurred, not when the cash leaves the bank. A bill received in March for March's electricity is a March expense even if the check is mailed in April.
Treating every purchase as an immediate expense.
A long-lived purchase like a delivery van or an oven is an asset first; its cost becomes an expense gradually as it is used up, not all on the day it is bought.
Mixing up expenses with liabilities.
An expense is a cost that reduces income for the period; a liability is an amount owed. An unpaid bill is both at once, but each label answers a different question.
Assuming every expense is tax-deductible.
Most, but not all, expenses are deductible, and the rules vary by jurisdiction. What is deductible is a tax-law question, not an accounting one.
Cutting every cost that can be cut.
The goal is not the lowest spending total; it is spending that earns more than it costs. Cutting marketing that brings in new customers can reduce profit, not increase it.
Easily confused
Expense vs. Asset
An expense is a cost used up in the current period to earn revenue; an asset is a resource kept to serve future periods. The same purchase cannot be both at once, though an asset's cost becomes an expense over time.
Expense vs. Liability
An expense is a cost incurred that reduces this period's income; a liability is an amount owed. An unpaid expense bill is recorded as both, but each answers a different question: what did it cost, versus what do we owe?
Operating expense vs. Non-operating expense
Operating expenses — rent, wages, materials, utilities, marketing — support the everyday business; non-operating expenses such as interest on a loan sit outside the core operations. Both reduce income, but readers of statements watch them separately.
Key vocabulary
- expense
- The cost of resources used up to earn revenue, recorded in the period the cost is incurred.
- expense recognition principle
- The accounting rule that matches expenses with the revenue they help produce.
- asset
- A resource a business owns that will provide value in a later period, such as equipment or inventory.
- liability
- An amount a business owes to another party, such as an unpaid bill or a loan.
- equity
- The owners' stake in the business: assets minus liabilities.
- retained earnings
- The part of equity built up from profits the business kept rather than paid out.
- operating expenses
- The day-to-day costs of running the business, such as rent, wages, utilities, and marketing.
- cost of goods sold
- The direct cost of the materials and goods that were sold to customers.
- budget
- A spending plan that sets targets in advance so a business can compare actual results against them.
Sources & references
- Principles of Accounting, Volume 1: Financial Accounting, Section 3.2: Define and Describe the Expanded Accounting Equation and Its Relationship to Analyzing Transactions — OpenStax, Rice University
- Expenses - Definition, Types, and Practical Examples — Corporate Finance Institute (CFI)
- The 3 Financial Statements: Income Statement, Balance Sheet, & Cash Flow Statement — Corporate Finance Institute (CFI)
- Budgeting — Corporate Finance Institute (CFI)
EliExplains lessons are original prose written from the open, credible references above. See Copyright & Licensing.
Researched 2026-08-21
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