Expenses are the decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants (IASB Framework).
Expense is simply a decrease in the net assets of the entity over an accounting period except for such decreases caused by the distributions to the owners. The first aspect of the definition is quite easy to grasp as the incurring of an expense must reduce the net assets of the company. For instance, payment of a company’s utility bills reduces cash. However, net assets of an entity may also decrease as a result of payment of dividends to shareholders or drawings by owners of a business, both of which are distributions of profits rather than expense. This is the significance of the latter part of the definition of expense.
Following is a list of common types of expenses recognized in the financial statements:
- Salaries and wages
- Utility expenses
- Cost of goods sold
- Administration expenses
- Finance costs
- Impairment losses
Expense is accounted for under the accruals principal whereby it is recognized for the whole accounting period in full, irrespective of whether payments have been made or not.
As expense is an element of the income statement, it is calculated over the entire accounting period (usually one year) unlike balance sheet items which are calculated specifically for the year end date.