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Expenses

A type of expenditure that flows through the income statement and is deducted from revenue to arrive at net income

What is an Expense?

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 when they are paid for.

 

Types of Expenses

 

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.

  • Operating
    • Cost of Goods Sold (COGS)
    • Marketing, advertising, and promotion
    • Salaries, benefits, and wages
    • Selling, general and administrative (SG&A)
    • Rent and insurance
    • Depreciation and amortization
    • Other
  • Non-operating
    • Interest
    • Taxes
    • Impairment charges

 

  • Fixed
    • Rent
    • Salaries, benefits, and wages (sometimes fixed and sometimes variable)
  • Variable
    • Transaction fees
    • Commissions
    • 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.

The statement of cash flows is where the actual timing of cash payments for all expenditures will be reflected. To learn more, check out CFI’s free tutorial on how to link the thee financial statements in Excel.

 

Expenses Example – Amazon

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 cost of sales, fulfillment, marketing, technology and content, general and administrative, and other.

Non-operating expenses comprise interest expense (and income), and other expense (income). Finally, Amazon has charged a provision for income taxes and accounted for equity method investment activity.

 

Expenses Example – Amazon

 

To learn more, check out CFI’s Free Accounting Courses.

 

Tax Deductible Expenses

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.

 

Additional Resources

CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful:

  • Capitalizing R&D Expenses
  • Depreciation Methods
  • Goodwill Impairment Accounting
  • Projecting Income Statement Line Items

Free Accounting Courses

Learn accounting fundamentals and how to read financial statements with CFI’s free online accounting classes.
These courses will give the confidence you need to perform world-class financial analyst work. Start now!

 

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