The cost a business incurs in its day-to-day operations to generate revenue, such as rent, salaries, utilities, and supplies.
What is Expense?
In accounting, an expense is an outflow of money or other assets, or the recognition of a liability, that is directly related to running a business. Expenses reduce a company’s net income and are recorded on the income statement for the period in which they are incurred.
Expenses can be classified in several ways:
- Operating Expenses (OPEX): Costs related to normal business activities, such as marketing, rent, payroll, and office supplies.
- Cost of Goods Sold (COGS): Direct costs of producing or purchasing goods for sale, such as raw materials and manufacturing labor.
- Non-Operating Expenses: Costs unrelated to core operations, like interest payments or currency exchange losses.
- Capital vs. Revenue Expenses: Capital expenses (CapEx) are for long-term assets and are not immediately deducted; revenue expenses are deducted in the period they are incurred.
Example:
- A U.S. LLC paying $1,200 in monthly rent, $3,000 in employee salaries, and $500 for utilities would record each of these as operating expenses.
- If the business buys inventory for resale at $5,000, that amount is recorded as COGS.
For non-U.S. founders, tracking expenses accurately is essential for:
- Tax purposes: Certain expenses can be deducted to lower taxable income.
- Financial analysis: Understanding where money is spent helps in budgeting and improving profitability.
- Compliance: Proper categorization ensures accurate bookkeeping and preparation for IRS or state audits.
In short, expenses represent the cost of doing business, and managing them effectively is critical to maintaining a healthy cash flow and ensuring compliance with U.S. accounting and tax rules.
