Expense: Difference between revisions

In [[accounting]], '''expense''' hasis a veryany specific meaning. It is an outflow of cash or other valuable assets from a person or company to another person or company. This outflow of cash is generally one side of a trade for products or services that have equal or better current or future value to the buyer than to the seller. Technically, an expense is an event in which ana [[asset]]proprietary stake is useddiminished upor exhausted, or a [[liability (accounting)|liability]] is incurred. In terms of the [[accounting equation]], expenses reduce owners' [[equity (finance)|equity]]. The [[International Accounting Standards Board]] defines expenses as:{{quote|...decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants.<ref>IFRS Framework, F.70</ref>}}

In [[double-entry bookkeeping]], expenses are recorded as a [[debit]] to an expense account (an [[income statement]] account) and a [[credit (finance)|credit]] to either an asset account or a liability account, which are [[balance sheet]] accounts. An expense decreases assets or increases liabilities. Typical business expenses include salaries, utilities, depreciation of capital assets, and interest expense for loans. The purchase of a capital asset such as a building or equipment is not an expense.

When an expense is seen as a purchase, it alleviates this distinction. Soon after the purchase, (that which was expenses holds no value), then it is usually identified as an expense. It will be viewed as capital with life that should be [[Amortization (business)|amortized]]/[[depreciation|depreciated]] and retained on the [[balance sheet]] if it retains value soon and long after the purchase.

Section 162(a) of the Internal Revenue Code is the deduction provision for business or trade expenses.<ref>{{USCSub|26|162|a}}</ref> In order to be a trade or business expense and qualify for a deduction, it must satisfy 5 elements in addition to qualifying as an expense. It must be (1) ordinary and (2) necessary (''[[Welch v. Helvering]]'' defines this as necessary for the development of the business at least in that they were appropriate and helpful). Expenses paid to preserve one's reputation do not appear to qualify).<ref>{{ussc|name=Welch v. Helvering|link=|volume=290|page=111|pin=113|year=1933}}</ref> In addition, it must be (3) paid or incurred during the taxable year. It must be paid (4) in carrying on (meaning not prior to the start of a business or in creating it) (5) a trade or business activity. To qualify as a trade or business activity, it must be continuous and regular, and profit must be the primary motive. An expense can be a loss or profit. But the loss or profit need not really be an expense.

In investing, one [[controversy]] that mounted throughout 2002 and 2003 was whether companies should report the granting of [[stock option]]soptions to [[employee]]semployees as an expense on the [[income statement]], or should not report this at all in the income statement, which is what had previously been the norm.