We explain what an expense is and the characteristics of each type. Also, the differences with costs and losses.
What is the expense?
The expense is the use of a certain budgeted money whether by an individual, a company, an organization or a State, to obtain a specific good or service in exchange. In that sense, the term is synonymous with expenditure, that is, the opposite of income.
However, in the world of economics and finance, a distinction is usually made between the different forms of spending, as well as between that carried out by an individual, never recovering it, and that carried out by companies, which In many cases it can be transformed later into new income that is, recover. In the latter case, we normally talk about an investment.
In any case, an expense is simply a voluntary outflow of money. We spend when we buy things, but also when we pay for services, which in the world of accounting is understood as a decrease in our assets. But, as we will see later, we should not confuse it with losses or costs, different notions in the world of economics.
Types of expenses
In accounting, there are three types of expenses:
- Fixed expenses. When it comes to regular and necessary amounts, which do not vary much, and which have a certain periodicity: monthly, like the electricity bill, or annually, like the taxes on a car.
- Flexible expenses. When they are regular and necessary expenses, such as fixed ones, but in which we have greater discretion regarding how much to spend, since we can assign the payment limit. This is the case, for example, with what we spend shopping for groceries, since we will pay as much as we decide to consume, even if the cost of each food is beyond our control.
- Discretionary expenses. When we have full control of the amount to spend, although they are not necessarily necessary or regular items, but quite the opposite: they are occasional expenses that depend on our desire, such as going to the movies, buying new clothes or even save money. We decide how much to spend and how, and whether to do it or not.
Difference between expense and cost
Costs are expenses that are part of a production chain. That is, an expense is an outflow of money that is not recovered, while a cost is an outflow of money intended to obtain a good or service necessary to produce other goods or services.
What was subsequently produced will generate income on its own, covering the amount spent on its production (ie: its production costs) and, perhaps, leaving a profit or surplus.
So a company's expenses on raw materials, labor or productive inputs are not usually counted as “expenses”, but rather as “costs”, since their return is expected. On the other hand, money used by said company for the Christmas party will properly be an expense, since it will not return (or at least its return will not be in money, but in happiness for the employees).
Difference between expense and loss
Similarly, expenses and losses are differentiated, since the latter They are involuntary outflows of money. They occur at the end of a productive chain, when the money obtained from the sale of the goods or services produced is not enough to cover their production costs.
For example, when an organization invests money in producing a good whose sale brings in less money than invested, it is said that the company “lost” money, that is, there were losses.
Expenses, on the other hand, as we have said, are outflows of money that do not return, but are used to obtain services and goods in exchange. Obviously, When a company is making losses, the first thing to cut is its expenses especially discretionary spending.
Continue with: Factors of production
References
- “Expense” on Wikipedia.
- “Expense” in the Language Dictionary of the Royal Spanish Academy.
- “Definition of expenditure” in El Economista (Spain).
- “Difference between costs and expenses” in Emprendepyme.
- “Difference between 'expense' and 'loss' in cost accounting” in AdConsultora.
