# Expense: Definition, Types, and How It Is Recorded

> **Definition**
>
> Expenses, both operating and nonoperating, are everything that costs a company to make money.

## What Is an Expense?

Expenses for a company are generally categorized as operating or nonoperating expenses. They’re every cost that a business runs into to produce income.

Common expenses include payments to suppliers, employee wages, factory leases, and equipment depreciation.

### Key Takeaways

*   There are two main categories of business expenses in accounting: operating expenses and nonoperating expenses.
*   Accountants record expenses through one of two accounting methods: cash basis or accrual basis.
*   Businesses write off tax-deductible expenses on their income tax returns, following guidelines set by the Internal Revenue Service (IRS).  
    

![Expense: Costs a company incurs to generate revenue.](https://www.investopedia.com/thmb/OSw7UYLoQURIiPXxwE5I7suwTw4=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/expense.asp-final-945ea7ad4a0c4eafb0dcf268e97756fc.jpg)

*The two main categories of business expenses in accounting are operating expenses and nonoperating expenses. — Jake Shi / Investopedia*

## Understanding Expenses

One of a company’s main goals is to maximize [profits](https://www.investopedia.com/terms/p/profit.asp). This is achieved by boosting [revenues](https://www.investopedia.com/terms/r/revenue.asp) while keeping expenses in check. However, if expenses are cut too much, it could have a detrimental effect. For example, paying less on advertising reduces costs, but it also lowers the company’s visibility and ability to reach out to potential customers.

Businesses are allowed to write off tax-deductible expenses on their income tax returns to lower their [taxable income](https://www.investopedia.com/terms/t/taxableincome.asp) and thus their tax liability. However, the [Internal Revenue Service (IRS)](https://www.investopedia.com/terms/i/irs.asp) has strict rules on which expenses businesses are allowed to claim as a deduction.

## How Expenses Are Recorded

Companies break down their revenues and expenses in their [income statements](https://www.investopedia.com/terms/i/incomestatement.asp). Accountants record expenses through one of two accounting methods: [cash basis or accrual basis](https://www.investopedia.com/ask/answers/09/accrual-accounting.asp). Under cash basis accounting, expenses are recorded when they are paid. In contrast, under the accrual method, expenses are recorded when they are incurred.

For example, say a business owner schedules a carpet cleaning. If the company uses the cash basis method, the accountant would record the expense when the company pays the invoice. If the company uses the accrual method, the accountant would record the expense when the company receives the service.

Expenses are generally recorded on an accrual basis, ensuring that they match up with the revenues reported in accounting periods.

> **Important**
>
> Expenses are used to calculate net income. The equation to calculate net income is revenues minus expenses.

## Types of Business Expenses

There are two main categories of business expenses in accounting: operating expenses and nonoperating expenses.

### Operating Expenses

[Operating expenses](https://www.investopedia.com/terms/o/operating-cost.asp) are the expenses related to a company’s main activities, such as the cost of goods sold, administrative fees, office supplies, direct labor, and rent. These are the expenses that are incurred from normal, day-to-day activities.

Operating expenses are deducted from revenues to arrive at [operating income](https://www.investopedia.com/terms/o/operatingincome.asp), which is the amount of profit a company earns from its direct business activities.

### Nonoperating Expenses

[Nonoperating expenses](https://www.investopedia.com/terms/n/non-operating-expense.asp) are not directly related to the company’s core operations. Common examples include [interest](https://www.investopedia.com/terms/i/interest.asp) charges and other costs associated with borrowing money. These are expenses that occur outside of a company’s day-to-day activities. These costs may occur from restructuring, reorganizing, interest charges on debt, or obsolete inventory.

Nonoperating expenses are kept separate from operating expenses from an accounting perspective, so it’s clear how much a company earns from its core activities.

## Special Considerations

### Capital Expenses

[Capital expenditures](https://www.investopedia.com/terms/c/capitalexpenditure.asp), commonly known as CapEx, are funds used by a company to acquire, upgrade, and maintain physical assets such as property, buildings, an industrial plant, technology, or equipment.

The IRS treats [capital expenses differently](https://www.investopedia.com/ask/answers/112814/whats-difference-between-capital-expenditures-capex-and-operational-expenditures-opex.asp) from most other business expenses. While most costs of doing business can be expensed or written off against business income the year they are incurred, capital expenses must be [capitalized](https://www.investopedia.com/terms/c/capitalization.asp) or written off slowly over time.

The IRS has a schedule dictating the portion of a capital asset that a business may write off each year until the entire expense is claimed. The number of years over which a business writes off a capital expense varies based on the type of asset.

### Not All Expenses Can Be Deducted

According to the IRS, to be [deductible](https://www.investopedia.com/terms/d/deductible.asp), a business expense “must be both ordinary and necessary.” Ordinary means the expense is common or accepted in that industry, while necessary means the expense is crucial to earning income. Business owners are not allowed to claim their personal, nonbusiness expenses as business deductions. They also cannot claim lobbying expenses, penalties, and fines.

## What Are Examples of Expenses?

Examples of expenses include rent, utilities, wages, maintenance, depreciation, insurance, and the cost of goods sold. Expenses are usually recurring payments needed to operate a business.

## What Are the Types of Expenses?

Expenses can be categorized in a variety of ways. One type is a [fixed expense](https://www.investopedia.com/terms/f/fixedcost.asp), which doesn’t change with the change in production. (Examples include rent or a mortgage.) Another type is a [variable expense](https://www.investopedia.com/terms/v/variablecost.asp), which changes with the level of production. (Examples include utilities and the cost of goods sold.) Expenses can also be categorized as operating and nonoperating expenses. The former is directly related to operating the company, while the latter is indirectly related.

## Is a Salary Considered an Expense?

Yes, a salary is considered an expense and is reported as such on a company’s income statement.

## The Bottom Line

An expense is a cost that a business experiences in running its operations. Expenses include wages, maintenance, rent, and depreciation. There are nonoperating expenses as well.

Expenses are deducted from revenue to arrive at profits. Businesses are allowed to deduct certain expenses to help alleviate their tax burden. However, if you have questions about what’s deductible, it’s typically a good idea to consult with a tax expert.

> **Article Sources**
>
> 1.  Internal Revenue Service. “[Guide to Business Expense Resources](https://www.irs.gov/forms-pubs/guide-to-business-expense-resources).”
>     
> 2.  Internal Revenue Service. “[Tangible Property Regulations—Frequently Asked Questions](https://www.irs.gov/businesses/small-businesses-self-employed/tangible-property-final-regulations).”
>     
> 3.  Internal Revenue Service. “[Publication 334: Tax Guide for Small Business](https://www.irs.gov/pub/irs-pdf/p334.pdf).” Pages 30–39.