What is an Expense Account?
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Expenses are the costs incurred to generate revenues. In other words, a firm records an expense when it disburses cash or promises to disburse cash for an asset or service used to generate income. A manufacturer would record an expense when it pays its employees for producing its products.
Expenses accounts are equity accounts with a debit balance. Expense accounts are considered contra equity accounts because their balance decreases the overall equity balance. In other words, debiting an expense account increases the balance instead of decreasing it like most other equity accounts.
Expenses are subtracted from revenues to calculate overall equity in the expanded accounting equation and calculate net income on the income statement.
Types of Expense Accounts – Examples
There are tons of different expense accounts. Think about how many costs a business incurs to produce and sell a product. Everything from production costs to selling costs is included in the main expense account.
Just like revenues, expenses are generally separated into two main categories: operating and non-operating.
Operating Expenses
Operating expenses include all costs that are incurred to generate operating revenues like merchandise sales. Here are some examples of common operating expenses.
Rent – Businesses that can’t afford to purchase a space to operate usually rent a space from another company. These monthly rental payments are recorded as an expense. Buildings and floor space aren’t the only thing rented, however. Equipment and vehicles are also commonly rented by businesses.
Wages – Employers have to pay their employees to perform operations in the company. Some employees produce goods while others perform administrative functions like bookkeeping. The company pays all of these employees for their time and efforts. These payments are recorded as wages or salary expenses.
Utilities – Utilities costs include electricity, water, heat, and even telephone services. These payments are necessary any business to operate.
Advertising – Advertising consists of payments made to another company to promote products or services. Just about every company advertises their products or services in one way or another. These payments are recorded as operating expenses because they help sell generate operating revenues.
Non-operating Expenses
Non-operating expenses include costs that can’t be linked back to operating revenues. Interest expense is the most common non-operating expense.
Interest Expense – Interest is the cost of borrowing cash for a period of time. Loans from banks or bonds usually require regular interest payments to compensate the lender. These payments don’t generate operating income, so they are recorded as a non-operating expense.
There are many more types of expenses, but this is the basic list. We will discuss more expenses in depth later in the accounting course. Right now let’s move on to talk about accounting ledgers.
