Expense

Expense

Expenses redirects here. For the row about members expenses in the UK Parliament which started about, Indirect expenses are those expenses which are incurred after the manufacturing of goods.

In common usage, an expense or expenditure is an outflow of money to another person or group to pay for an item or service, or for a category of costs. For a tenant, rent is an expense. For students or parents, tuition is an expense. Buying food, clothing, furniture or an automobile is often referred to as an expense. An expense is a cost that is paid or remitted, usually in exchange for something of value. Something that seems to cost a great deal is expensive. Something that seems to cost little is inexpensive. Expenses of the table are expenses of dining, refreshments, a feast, etc.

In accounting, expense has a very 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 an asset is used up or a liability is incurred. In terms of the accounting equation, expenses reduce owners' equity.

 

Bookkeeping for expenses

In double-entry bookkeeping, expenses are recorded as a debit to an expense account in income statement account and a 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.

Definition of Expense

 

1. The economic costs that a business incurs through its operations to earn revenue. In order to maximize profits, businesses must attempt to reduce expenses without also cutting into revenues. Because expenses are such an important indicator of a business's operations, there are specific accounting rules on expense recognition.

2. Money spent or costs incurred that are tax-deductible and reduce taxable income.

Money spent or cost incurred in an organization's efforts to generate revenue, representing the cost of doing business. Expenses may be in the form of actual cash payments such as wages and salaries, a computed expired portion depreciation of an asset, or an amount taken out of earnings such as bad debts. Expenses are summarized and charged in the income statement as deductions from the income before assessing income tax. Whereas all expenses are costs, not all costs such as those incurred in acquisition of income generating assets are expenses.

Explains Expense

 

1. Expenses are the opposite of revenues. Examples of expenses include payments to suppliers, employee wages, factory leases and depreciation.

2. Tax authorities frequently have very specific regulations that allow people to deduct certain expenses if used for business-related activities. For example, a traveling salesperson is allowed to deduct traveling expenses fuel expenses and car rental costs as a business deduction, because those costs are an integral part of the job.

Types of expenses

1.   Indirect Expenses
2.  Direct Expenses

Indirect Expense

Indirect expenses are those expenses which are incurred after the manufacturing of goods. To understand indirect expenses we should first understand direct expenses. Direct expenses are those which are incurred in relation to the manufacturing of a product directly.

            So, indirect expenses will be like, selling and distribution expenses, all the administrative expenses, carriage outwards, advertisement expenses because they are related indirectly with the product manufacturing and sales. 

Difference between Direct Expenses and Indirect Expenses

There are 2 types of expenses that you can deduct related your home office business,  Direct Expenses and Indirect Expenses. 

·         Direct Expenses:  Direct expenses are those expenses that are paid only for the business part of your home.  For example, if you pay for painting or repairs only in the area used for business, this would be a direct expense. 

·         Indirect Expenses:  Indirect Expenses are those expenses that are paid for keeping up and running your entire home.  Examples of indirect expenses generally include insurance, utilities, and general home repairs.  Since these are expenses you would pay for the entire home, these are considered indirect expenses. 

·         Direct Expenses are those expenses which are incurred in relation to manufacture of products directly eg: Machinery repairs, Labour, Factory etc.

·        
Indirect Expenses are those expenses which are incurred after manufacturing of goods. Eg: Administrative Exp, Advertisement, Selling & Distribution etc.

What are indirect expenses:

 

Indirect expenses are those expenses that are incurred to operate a business as a whole or a segment of a business, and so cannot be directly associated with a cost object, such as a product, service, or customer. A cost object is any item for which you are separately measuring costs.

Examples of indirect expenses are

·         Accounting, audit, and legal fees

·         Business permits

·         Office expenses

·         Rent

·         Supervisor salaries

·         Telephone expense

·         Utilities

Direct & indirect expenses

               The expenses related to an activity may be direct or indirect.

Direct expenses

“Direct expenses” are the costs you incur when you carry out a specific activity. If you did not carry out this activity, you would not have these costs.

1.      Printing flyers to advertise an event.

2.      A long distance telephone call to counsel a client.

3.      An instructor's travel to present an education program.

4.      Laboratory supplies used exclusively in a research program.

Indirect expenses

“Indirect expenses” are expenses that support more than one activity of the charity or that permit the charity to carry on its work. Even if you did not carry out a specific activity, you would still incur some or all of these costs.

1. The charity publishes a regular monthly newsletter that provides news and information to members and thanks donors and funders for their support as well as promotes the upcoming events of the organization.
2. The charity's telephone system is used to provide counseling services as well as support other services and activities.
3. The executive director travels across the country, teaching education programs, visiting funders, and doing performance reviews with regional staff members.
4. A laboratory is sometimes used by several researchers and sometimes rented out to other organizations.

Direct Expense

In accounting glossary, direct expenses are the part of expenses classification. In expenses classification, we can divide total expenses into direct and indirect. Direct expenses are relating to production and purchasing of goods. All expenses which are incurred for production or purchasing are called direct expenses. It is the part of prime cost or cost of goods of company product. It shows the debit side of trading account.

What is direct expense:

Direct expense is an expense incurred that varies directly with changes in the volume of a cost object. A cost object is any item for which you are measuring expenses, such as products, services, sales regions, employees, and customers.  Here are several examples of direct expenses:

·         The materials used to construct a product for sale

·         The cost of the freight needed to transport goods to and from the manufacturing facility

·         The labor incurred to produce hours billable to a client

·         Labor and payroll taxes paid based on the number of units produced

·         Production materials consumed during the manufacture of goods   

·         The commission and payroll taxes related to the sale of goods or services

Direct expenses are typically listed within the cost of goods sold section of the income statement. However, commission expenses are sometimes categorized lower down, in the selling and administrative expenses section of the income statement.

When the income statement is revised to only include direct expenses in the cost of goods sold, this is called a contribution margin income statement.

There are many more types of expenses that are not direct expenses - they are called in direct expenses, because they do not vary with changes in the volume of a cost object. 

What are direct Expense

Direct expenses are any types of expenses that are specifically related to the creation of a product or service. Expenses of this type may include the raw materials used in the manufacturing process, as well as labor costs associated with employees who manage the actual production. The classification of indirect and direct expenses is very important to the function of a business enterprise, not only in terms of managing operational costs but in some cases also in the calculation of taxes.

The key difference between indirect and direct expenses is that the latter is actively used in the production process. In contrast, the former has to do with managing costs that make it possible to accept and process orders, promote the product line, and generally support the efforts of the manufacturing enterprise. Some examples of indirect expenses include sales and public relations efforts, research and development, and the maintenance of an organized accounting effort.

Accounting for direct expenses is a key element within any business. Failing to accurately keep track of the cost of raw materials, labor costs, and other expenses directly involved in the manufacturing effort can make it difficult to set unit prices for the products produced that are sufficient to cover those expenses. When this happens, the business may generate a great deal of sales, but ultimately not take in enough per unit to sustain the operation over the long-term.