What is Expense - Definition And Meaning

What is An Expense Account / What Does Expense Mean

Here we will study about the most important topic in Accounting that is “What is an Expense”?

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Expense Definition

Expenses are the costs incurred for the purpose of earning the Revenues. In expenses, at first, the business gets the benefit and then later on, the business makes the payment for that particular expense. Examples are Salaries, Telephone Bills, Electricity Bills, Fees Paid, Commission Paid, Rent Expenses, etc. These are also known as Revenue Expenditures.

For Example, if the business paid Salaries To Employees During the Current Accounting Period For Rs. 1000000, then it is an Expense for the business and it is incurred for the purpose of operating the business effectively and ultimate generates sales for the business. Following Accounting Journal Entry is passed in the Book of Salaries of the Business:

                                 Salaries a/c 1000000
                                                                        

                                                                 Cash a/c 1000000

(Paid Salaries To Employees For Rs. 1000000)

The Expense Account has no balance because it is the results of profitable activities of the owners of the business, so it is closed at the end of every Accounting Period and transferred to the Profit & Loss Account or Income Statement or Statement of Comprehensive Income. When Expense increases, we debit it and when it decreases we credit it.

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And 

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Example: The Business paid Salary Rs. 500000 to an Employee on 5th May, 2018.

The above is a Business Transaction. Here, two accounts are involved in it. One is Salary which is an expense while other one is Cash that is a Current Asset. As the business is paying the expenses to the employee, so expenses are increasing by Rs. 500000 in the business, so we Debit it while the Cash is decreasing by Rs. 500000 as the Cash is going from the business, so we Credit it as shown below in the Accounting Journal Entry:

                                       Salary a/c   500000                

                                                          Cash a/c   500000

                                            (Paid Salary Rs. 500000 To An Employee)

There are two types/kinds of Expenses:

Direct Expenses Indirect Expense

Direct Expenses are related to those which are incurred in purchasing the goods or which helps in the producing the product. Examples are Fright, Wages, Transportation Costs, etc.

Indirect Expenses are not concerned with the purchase or production of goods, so these are other expenses. Examples are Salaries, Administrative Expenses, Printing & Stationary, Rent Expenses, etc.

Do Expenses Go On The Balance Sheet?

Or

Is An Expense An Asset

No, as these are the costs of producing revenues to invest and acquire Assets and not the resources to provide benefits in future.

So, “What Does Expense Mean In Accounting”? We can say that expense plays an important role in generating revenues for the business of the company.