Expenses

Expenses

Expenses are cost of doing business. Expenses are necessary to run day to day operations of business. Thus expenses are critical to generate profits. Equity reduction is an important characteristic of expense.

Examples of Expenses

a)    Rent.

b)   Salary paid.

c)    Utilities.

d)   Deprecation.

e)    Interest.

Recognition of Expenses

Expenses can be recognized in the books of account subject to fulfillment of following conditions.

a)    A Financial item qualifies the definition of expense.

b)   The amount of expense can be measured reliably.

Recording Rules of Expense

Increase in expense is debited in the journal, while decrease in expense is credited in the books of account or journal. This rule has been explained with an easy example

a)    Salary paid in cash of 30,000

b)   Rent paid in cash 40,000.

Salary shall be debited being increase in expense, while cash paid shall be credited being decrease in cash (asset).

Date	Particular	Folio	Dr.	Cr.
	Salary A/c		30,000
	Cash A/c			30,000

Rent shall be debited in the books of being increase in expense, while cash paid shall be credited in books of accounts being decrease in cash (asset).

Date	Particular	Folio	Dr.	Cr.
	Rent A/c		40,000
	Cash A/c			40,000

 Dividend is not Expense

Payment to shareholder is not profit and such payments are directly deducted from the equity. The technical name used for profit distribution is dividend.

Capital & Revenue Expenditure

Capital expenditure is long term expenditure; it means that capital expenditure would provide long term benefit like purchase of asset, while revenue expenditure would provide short term benefit like rent, salary. This topic has been covered in my other article in more detail

Deductible expenditure & non deductible expenses

Those expenses which are allowed to be deducted under income tax laws are known as deductible expenditure. Some expenditure is not allowed under income tax laws are known as non deductible.

The deductible expenditure is primarily for tax calculation purposes and therefore these expenses are charged as business expense, but tax authorities add back these expenses for tax calculation purposes. For example entertainment may not be disallowed under a tax law, and then this expense is charged as business expenses, but not qualifies to be a deductible expense.