A type of expenditure that flows through the income statement and is deducted from revenue to arrive at net income
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Businesses incur various types of expenses. An expense is a type of expenditure that flows through the income statement and is deducted from revenue to arrive at net income. Due to the accrual principle in accounting, expenses are recognized when they are incurred, not necessarily when they are paid for.
Types of Expenses
As the diagram above illustrates, there are several types of expenses. The most common way to categorize them is into operating vs. non-operating and fixed vs. variable.
Salaries, benefits, and wages (sometimes fixed and sometimes variable)
Marketing and advertising (sometimes fixed and sometimes variable)
Expenses vs Capital Expenditures
The only difference between an expense and a capital expenditure is that an expense has been recognized under the accrual principle and is reflected on the income statement, whereas a capital expenditure goes straight to the balance sheet as an asset.
Once a capital expenditure goes on the balance sheet as an asset, it can be expensed later as depreciation and amortization, which flows through the income statement.
Below is an example of Amazon’s 2017 income statement (statement of operation) which lists their main categories of expense. As you can see, Amazon separates its costs into two categories.
Operating expenses consist of the cost of sales, fulfillment, marketing, technology and content, general and administrative, and others.
Non-operating expenses comprise interest expense (and income), and other expenses (income). Finally, Amazon has charged a provision for income taxes and accounted for equity method investment activity.
Most, but not all, expenses are deductible from a company’s income (revenues) to arrive at its taxable income. The most common tax-deductible expenses include depreciation and amortization, rent, salaries, benefits, and wages, marketing, advertising, and promotion.
Items that are not tax-deductible vary by region and country. It’s important to consult a professional tax advisor to learn about what expenses are deductible and not deductible in your or your company’s situation.
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