Expenses in accounting: Definition, types, and recording

Expenses in accounting are decreases in economic benefits during an accounting period in the form of asset outflows or liability incurrences that reduce equity. In simpler terms, they’re the costs you incur to generate revenue in a given period.

When you record expenses correctly, you get an accurate view of profitability and cash flow. When you don’t, margins distort and decisions rely on incomplete data. That’s why expense accounting sits at the center of day-to-day financial management.

What are expenses in accounting?

In accounting, expenses are decreases in economic benefits during an accounting period in the form of asset outflows or liability incurrences that reduce equity. In practical terms, they’re the costs of running your business that help generate revenue. They appear on the income statement and reduce net income for the period.

Expenses differ from cash payments because recognition depends on when the cost is incurred, not when money leaves your bank account. If a vendor performs services this month, the expense belongs in this month’s financials—even if you pay the invoice later. That timing distinction is foundational to accurate reporting.

Expenses vs. other financial concepts

Expenses are often confused with assets, liabilities, and capital expenditures, but each plays a different role in your accounting system.

An expense delivers value within the current period, while an asset provides benefit over multiple periods. Capital expenditures are recorded as assets first and then expensed gradually through depreciation or amortization.

Expenses and the income statement

Expenses reduce revenue to determine net income. They’re typically grouped into categories like cost of goods sold (COGS), operating expenses, and non-operating expenses. Cost of goods sold includes direct production costs, while operating expenses support the business overall but aren’t directly tied to production.

Because expenses reduce net income, even small classification or timing errors can materially change reported results. Consistent expense recognition protects the accuracy of both internal analysis and external reporting.

Expenses vs. expenditures

Expenses and expenditures are related but not interchangeable.

• Expenditures refer to any outflow of cash or commitment to pay cash
• Expenses are expenditures you recognize on your income statement because their economic benefit has been consumed

Timing is the key difference. An expenditure may become an expense immediately, later, or gradually, depending on what was purchased and how you use it.

For example, if you pay $12,000 upfront for a one-year insurance policy, the full payment is an expenditure today. Only $1,000 per month is recorded as an expense as coverage is used.

How to record expenses

You record expenses using double-entry accounting, which means every transaction affects at least two accounts. When you recognize an expense, you debit the appropriate expense account and credit either cash, accounts payable, or another liability account.

Expense accounts carry a normal debit balance. Because expenses reduce equity, they increase on the debit side under double-entry accounting. Credits either reduce assets or increase liabilities, depending on how the expense is paid or incurred.

For example, when you pay a utility bill in cash, utilities expense increases and cash decreases. When you receive a bill you haven’t paid yet, the expense increases and accounts payable increases instead.

Normal balance of expense accounts

Expense accounts increase with debits and decrease with credits. This structure allows expenses to flow into the income statement at the end of each period.

If an expense account shows a credit balance, it usually signals a misclassification, reversal, or incorrect journal entry that needs review.

Journal entry examples

Below are common expense transactions and how you record them.

Paying cash for office supplies

Your business purchases office supplies and pays immediately with cash. Because the supplies are consumed right away, you recognize the cost in the current period.

This entry records both the operating cost and the reduction in available cash.

Receiving a vendor invoice to be paid later

You receive an invoice for professional services that have already been performed. Even though you haven’t paid yet, the expense belongs in the current period.

This ensures the expense appears in the correct period while recording the obligation to pay.

Paying down an accrued expense

You pay an expense that was previously recorded as accrued. Because the expense was already recognized, you don’t record a new expense.

This entry clears the liability from the balance sheet without affecting the income statement again.

The matching principle

The matching principle requires you to recognize expenses in the same period as the revenue they help generate. This ensures your financial statements reflect true profitability for each reporting period.

Instead of recording costs when cash moves, matching focuses on economic cause and effect. If a cost contributes to revenue in a given period, it belongs in that period’s income statement.

Examples of matching in practice include:

• Recording cost of goods sold when inventory is sold, not when it’s purchased
• Recognizing commission expense in the same month a sale closes
• Allocating prepaid software costs monthly over the contract term

Accrual basis vs. cash basis accounting

Under accrual accounting, you record expenses when they’re incurred, regardless of when payment occurs. Under the cash basis method, you record expenses only when cash is paid.

Accrual accounting provides a more accurate picture of profitability because it aligns expenses with related revenue. Under GAAP, most companies are required to use accrual accounting to ensure consistency and comparability across reporting periods. Cash basis accounting is simpler but can distort results when payments are irregular.

You’ll likely use accrual accounting if you:

• Operate as a corporation or venture-backed startup
• Carry inventory
• Are required to follow GAAP

Cash basis accounting is more common among very small businesses and sole proprietors with simple operations.

4 types of business expenses

You can categorize business expenses in several ways to support reporting and analysis. Common groupings include operating vs. non-operating, fixed vs. variable, and capital vs. operating.

These classifications help you understand cost behavior, forecast cash needs, and identify efficiency opportunities. Most companies use multiple classification layers depending on their reporting needs.

Operating expenses

Operating expenses, or OpEx, are costs incurred in normal business operations. They don’t directly relate to producing goods but support overall activity.

Common examples include:

• Rent and utilities
• Salaries and wages
• Office supplies
• Software subscriptions

Operating expenses appear above operating income on the income statement and are a primary focus of cost control efforts.

Non-operating expenses

Non-operating expenses arise from activities outside your core operations. Separating them helps readers evaluate recurring business performance.

Examples include:

• Interest expense
• Lawsuit settlements
• Losses on asset sales

These expenses reduce net income but don’t reflect day-to-day operational efficiency.

Fixed vs. variable expenses

Fixed expenses remain relatively constant regardless of output, while variable expenses change with activity levels.

Examples by industry include:

• SaaS: Fixed engineering salaries versus variable cloud usage costs
• Retail: Fixed store rent versus variable inventory purchases
• Manufacturing: Fixed equipment leases versus variable raw materials

Understanding this distinction supports budgeting, forecasting, and break-even analysis.

Capital expenditures

Capital expenditures are investments in assets that provide long-term value. Unlike regular expenses, they’re capitalized and expensed gradually over time.

Depreciation and amortization allocate these costs across periods. Depreciation applies to tangible assets like equipment, while amortization applies to intangible assets like patents or software.

You capitalize costs when an asset provides benefit beyond the current period. You expense costs immediately when the benefit is consumed right away.

Common expense account categories

Most businesses organize expenses into standard account categories for reporting consistency. This structure separates production costs from overhead and growth investments, making margin analysis clearer.

Expense recognition and accounting principles

You recognize expenses when they’re incurred and when they contribute to revenue, in accordance with generally accepted accounting principles (GAAP). Under GAAP, accrual accounting governs expense timing to ensure consistency and comparability across reporting periods.

Relevant principles include the matching principle, revenue recognition rules, and consistency requirements. Together, they prevent timing manipulation and misstatement.

Paying rent journal example

Assume your business pays $5,000 in monthly office rent on the first day of the month. Because the space is used during that same month, the cost is expensed immediately.

This entry records the cost of occupying the office and reduces cash at the same time.

Accruing salaries

Employees earn $12,000 in wages during the last week of December, but payroll won’t be paid until January. The expense must still be recorded in December.

This matches labor costs to the period in which the work was performed.

Recording depreciation

Assume your company purchases equipment for $60,000 with a five-year useful life and no salvage value.

Monthly depreciation expense = (Asset cost – Salvage value) / Useful life

Monthly depreciation expense = ($60,000 – $0) / 60 months = $1,000

You record the monthly depreciation as follows:

This spreads the cost of the asset over its useful life while keeping the original asset value visible on the balance sheet.

Expense management best practices

Strong expense management starts with visibility and control across every spending channel. Without centralized data, even well-designed budgets break down as expenses spread across cards, reimbursements, and invoices.

Key best practices include:

• Centralization: Consolidate all spend data in one system so you can see real-time activity across departments and vendors. This reduces blind spots and improves forecasting accuracy.
• Enforcement: Enforce expense policies at the point of spend, not after the fact. Automated rules prevent out-of-policy purchases before they happen.
• Standardization: Standardize expense categories and coding to ensure clean financial reporting. Consistency reduces reconciliation work at month-end.

Modern expense management also relies on automation. Receipt capture, auto-categorization, and accounting integrations reduce manual entry and lower error rates.

Clear approval workflows matter just as much as technology. When employees understand spending limits and managers approve expenses quickly, you avoid delays while maintaining control.

Centralize spend data and automate expense tracking with Ramp

Accurate expense recording is only part of the equation. To maintain control at scale, you need visibility and enforcement built into your spending process.

Ramp's accounting automation software centralizes spend data on one platform and automates expense tracking so you can prevent overspending before it affects your bottom line.

Here’s how:

• Real-time spend visibility: Ramp consolidates corporate card transactions, reimbursements, and bill payments in one dashboard so you can see spending across departments, vendors, and categories as it happens
• Automated controls: Set spending limits at the card, department, or merchant level, and Ramp enforces them automatically. Transactions that exceed limits are declined instantly, reducing out-of-policy spend
• Smart receipt matching: Ramp matches receipts to transactions and flags missing documentation so you maintain complete records without chasing employees
• Policy enforcement: Configure approval workflows and spending policies once, and Ramp applies them automatically to every transaction

By connecting spend controls directly to accounting workflows, you reduce manual cleanup and gain clearer, real-time visibility into how expenses flow through your business.