Characteristics of Expenses

Characteristics of Expenses

Characteristics of expenses can be expressed or explained in terms of support operation, Generate profit, reduction in equity etc. we can define Expenses as cost of doing business. Expenses are necessary to manage day to day operations of the company.

Important Characteristics of Expenses

Some important characteristic of expenses have been explained below.

1.   Operation Management:

Expenses are important to manage the operations or business. Thus business could not continue to exit without necessary expenses. Expenses support all activities of business from production to sales and from marketing to transportation.

2.   Generate profit:

Another important characteristic of expense is to generate profit for the business. The profit cannot be generated until and unless necessary expenses are incurred on the activities necessary to generate profit. For example sales revenue is generated, when the necessary expenses are incurred on/for production of goods.

3.   Presentation of Expenses:

Expenses are part of statement of statement of comprehensive income. Expenses are presented in the first section of statement of comprehensive income, other section of comprehensive income comprise of financial items of special nature like gain on disposal of income.

4.   Expenses Reduces Equity:

Another important characteristic of expense is reduction in the equity. It is important to remember that expanse are not charged directly to equity, thus expenses does not directly reduces the equity, rather expenses reduces the equity by reducing the net income/profit of the company.

5.   Distribution of profit is not Expense

Distribution of profit to equity holder or share holder does not come under the definition of expenses; rather it is directly deducted from the equity.

6.   Revenue & Capital Expenditure

Expenses can be classified into capital and revenue expenses. Capital expenditure provide long run benefit to the company (benefit is not exhausted in single period).Examples of capital expenditure are plant & machinery, furniture etc.  

Revenue expenses benefit is exhausted immediately (within financial period). Examples of revenue expenses are salary , rent, etc. It is important to remember that capital expenditure is charged as revenue expense on the bases of benefit utilization. Depreciation is an example.

7.   Break Down Expenses

Typically the expenses either are classified by their function or by their nature. Each of this classification has been explained below with practical examples.  

a.    Marketing & Selling Expenses

b.    Cost of sales Costs or Expenses

c.    Factory overhead Cost or expenses.

d.    Finance Expenses

e.    Administration expenses.

Expenses may also be classified in term of their nature.

a.    Depreciation Expenses.

b.    Material Expenses.

c.    Employee’s salary.

8.   Recognition of Expenses

Expenses are recognized in books of accounts subject to fulfillment of following conditions

a.    Expenses satisfy the definition of the expenses.

b.    Economic benefits are expected to flow to organization.

c.    Amount of Expense can be measured reliably.

List of important Characteristics of Expenses

Some important characteristics of expenses are listed below

a.    Expenses are necessary for management of business.

b.    Expenses are incurred to generate profit & income for the company.

c.    An expense reduces the equity of the company.

d.    Profit distribution to equity holder/shareholder is not an expense.