Definition of Expense
An expense is a cost that has been used up, expired, or is directly related to the earning of revenues.
Most of a company’s expenses fall into the following categories:
- cost of goods sold
- sales, general and administrative expenses
- interest expense
How an Expense Affects the Balance Sheet
An expense will decrease a corporation’s retained earnings (which is part of stockholders’ equity) or will decrease a sole proprietor’s capital account (which is part of owner’s equity).
In addition to affecting retained earnings or the owner’s capital account, an expense will also cause one or more of the following changes to the balance sheet:
- A decrease in Cash, Prepaid Expenses, Supplies on Hand, Inventory
- An increase in the credit balance in the contra-asset account Allowance for Doubtful Accounts or Accumulated Depreciation
- An increase in the balance in the liability account Accounts Payable, or an increase in Accrued Expenses Payable (including Wages Payable, Interest Payable, etc.)
