What are expenses?

A penny saved…

Expenses are the cost of producing revenues.

The largest expense for most companies is something called cost of goods sold.  This is the cost of buying or making the products that you sell.  For example, if you buy vitamins for $10/bottle and sell them for $30/bottle, then your cost of goods sold for each bottle would be $10.

Cost of goods sold is subtracted as an expense when you actually sell the item of merchandise, not when you purchase the item of merchandise, and not when you pay for the item of merchandise.  Similarly, on your tax return, you usually can’t deduct an item’s cost of goods sold item until you actually sell it.

Other expenses include selling expense, such as advertising and sales commissions, administrative expense, and income tax expense.

Notice that expenses are supposed to produce revenues.  Therefore, when deciding whether or not to incur an expense, ask yourself a simple question: Will this expense increase my revenues?  Will it pay for itself?  If the answer is no, then save your money.

What expenses are deductible?

About Mark P. Holtzman

Chair of Accounting Department at Seton Hall University. PhD from The University of Texas at Austin. Worked at Deloitte's New York Office. BSBA from Hofstra University.

Trackbacks/Pingbacks

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  2. Accrued expenses explained « Accountinator - February 2, 2012

    […] expenses are expenses which you have incurred, or used, but have not yet paid for.  They are a liability on your balance […]

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    […] Expenses are the cost of bringing in revenues.  They were needed to bring in the revenues and profits that you reported this year.  Expenses appear on the income statement. […]

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