During the end of the accounting period, the company prepares a closing journal entry. This entry transfers the expense account balance to a temporary account called “Income Summary” or “Profit & Loss Summary”. Debiting the expense account for its current balance reduces the balance to zero. In May 2023, the retail business incurred various expenses related to COGS. The expenses were recorded as debit entries in the COGS account, increasing its balance. The credit entries represent returns, allowances, and adjustments that decrease the COGS account balance.

Types of Expenses

Log expenses as they occur using mobile apps and automated accounting software. This will improve the accuracy of your reporting and forecasting. Keep personal and business transactions separate by using a dedicated business bank account and credit card for all transactions.

Differences between expense and income accounts

Interest Expense – Interest is the cost of borrowing cash for a period of time. Loans from banks or bonds usually require regular interest payments to compensate the lender. These payments don’t generate operating income, so they are recorded as a non-operating expense.

Otherwise, they are listed in the general, selling and administrative expenses section of the income statement. With an expense account, you can easily compare your outgoing and incoming money. And by separating your expenses into different accounts, you can determine where all of your money is going. Expenses are the costs that a business incurs during regular business operations. You incur expenses when your business spends money (e.g., when you purchase a good or service). This example demonstrates how the COGS account tracks and reports direct expenses incurred for the sale of goods in a retail business.

Each expense is recorded as a debit entry in the account, increasing its balance. Because the expense has been incurred but not yet paid, it is an obligation recorded on your balance sheet as a current liability. Accrued expenses increase both the company’s expenses and its liabilities. While the goods or services have already been consumed, the payment happens in a future period.

These are accounts that record all of your business’s expenses. Expense accounts store information about different types of expenditures in an organization’s accounting records. The phrase most commonly refers to travel and entertainment expenses, and also applies to a type of account. General and administrative expenses include expenses incurred while running the core line of the business and include executive salaries, R&D, travel and training, and IT expenses. A summary of all expenses is included in the income statement as deductions from the total revenue.

important financial statements

Revenue minus expenses equals the total net profit of a company for a given period. Income accounts (or revenue accounts) track earnings from business activities. When you look at your company’s chart of accounts, you’ll likely notice that it’s primarily made up of expense accounts. Rent – Businesses that can’t afford to purchase a space to operate usually rent a space from another company.

Some Common Expense Accounts

• This allows you to have full oversight over the way your business is spending money.
• (Examples include rent or a mortgage.) Another type is a variable expense, which changes with the change in production.
• These are the expenses that are incurred from normal, day-to-day activities.
• These are costs that cannot be linked back to operating revenues.

The purchase of an asset such as land or equipment is not considered a simple expense but rather a capital expenditure. Assets are expensed throughout their useful life through depreciation and amortization. They help us categorize business expenditures to better understand spending habits across the business.

• Whether it’s lodging your BAS, preparing tax returns, generating insightful reports, or even handling ABN/GST registrations, TaxLeopard offers a seamless solution.
• In fact, breaking your expense account down into smaller accounts is suggested.
• It helps businesses monitor their spending and analyze where their money is allocated and spent.

Operating expenses include all costs that are incurred to generate operating revenues like merchandise sales. Think about how many costs a business incurs to produce and sell a product. Everything from production costs to selling costs is included in the main expense account. An expense is a cost that a business incurs in running its operations. 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.

What are expenses?

At the end of the month, total expenses recorded in the COGS account were calculated by summing up the debit column. This amount represents the cost incurred by the business to acquire or produce the goods sold during the month. They provide the necessary information to prepare financial statements, such as income or expense account definition profit & loss statements. The purpose of using different accounts for different types of expenses is to keep organized records and facilitate financial analysis and management decision-making. An expense account is a record of your business costs during a given accounting period, usually over a month, a quarter, or a year.

An expense account is used in accounting to track and categorize the various expenses incurred by a business during a specific period, such as a month, quarter, or year. It helps businesses monitor their spending and analyze where their money is allocated and spent. An accrued expense is a cost your business has incurred but hasn’t yet paid. It’s recorded in your accounting books before the actual payment is made. For example, unpaid wages owed to employees at the end of a reporting period are an accrued expense.

Typical company accounts

Unlike essential expenses, discretionary expenses are technically optional. A company could produce and sell products without these, even if most choose not to. A company will have a range of costs that aren’t considered optional. Included here may be depreciation expenses – the amount of value lost in an asset as it grows older. Cars, furniture and hardware all have an asset price which changes once they are no longer new. A record of the company’s gross income – the amount of sales made in a given period.

These five account types help to make up your general ledger, the information hub that records every financial transaction your company makes. In many businesses, this shows the amount of equity the owners (shareholders) have in the company. A record of the outstanding debts your company owes, which can then be balanced against assets. All the assets the company holds, without accounting for any losses or amounts owed. Below is a break down of subject weightings in the FMVA® financial analyst program.