Expense facts for kids

An expense is the money you spend to get something. It's like when you pay for a toy, a snack, or even a service like getting your hair cut. For someone renting a home, the rent they pay each month is an expense. For students, the money paid for school or college is an expense.

When you buy food, clothes, furniture, or a car, these are all expenses. An expense is a cost that you "pay" or "send out," usually to get something valuable in return. If something costs a lot, we say it's "expensive." If it costs very little, it's "inexpensive."

In accounting, an expense is when money or other valuable things leave a person or company and go to another. This usually happens when you trade money for products or services. These products or services should be worth the same or more to the buyer than they were to the seller. Basically, expenses reduce the money or value a business has.

The term expense is also used in sociology. This is when someone or something gives up a fortune or price, sometimes willingly, sometimes not. It often happens when one side takes advantage of the other.

Keeping Track of Expenses

When businesses keep track of their money, they use a system called double-entry bookkeeping. Expenses are recorded as a debit (meaning they increase the expense account) and a credit (meaning they decrease money or increase what the business owes).

An expense either makes a business's assets (what it owns) go down or its liabilities (what it owes) go up. Common business expenses include salaries for employees, utility bills (like electricity), the cost of equipment wearing out over time (called depreciation), and interest paid on loans. However, buying a big item like a new building or expensive machinery is usually not called an expense right away. It's considered a capital expenditure.

How Money Moves: Cash Flow

When a business looks at how its money moves, it creates a cash flow statement. This statement divides spending into three main types:

• Operating Expenses: These are the costs of running the business every day. An example is paying salaries to employees.
• Investing Expenses: This is money spent on things that help the business grow or produce income in the future. Buying new equipment is an example.
• Financing Expenses: These are costs related to how a business gets and manages its money. Paying interest on loans or bonds is an example.

It's important to know if a cost is an immediate expense or a capital expenditure. An immediate expense is reported right away on a business's income statement. A capital expenditure is for something that will last a long time, like a building. These are not reported as expenses right away. Instead, their cost is spread out over many years through something called depreciation. Most large businesses use this method.

If something you buy loses its value quickly, it's usually seen as an expense. But if it keeps its value for a long time, it's considered a capital item. Its cost is then slowly spread out over its useful life.

Business Expenses and Taxes

In the United States, businesses can often reduce the amount of tax they pay by deducting their business expenses. This means they can subtract these costs from their income before calculating taxes.

An expense is a cost that doesn't buy, improve, or make an asset last longer. For example, if a business buys a new truck, that's a capital expenditure because they got a new asset. They can't deduct the full cost of the truck right away. However, the gas they buy for the truck is an expense. It doesn't improve the truck, but it allows it to run, so it can be deducted.

Even if something is an expense, it might not always be deductible for tax purposes. Generally, expenses can be deducted if they are related to a business activity or if they help produce income from investments.

For an expense to be deductible as a business expense, it usually needs to be:

• Ordinary: Something common and accepted in that type of business.
• Necessary: Helpful and appropriate for the business.
• Paid or incurred: The money was spent or the debt was created during the tax year.
• In carrying on: The expense happened while the business was already running, not before it started.
• A trade or business activity: The business must be regular, continuous, and aiming to make a profit.

Expenses can also be deducted if they are for managing property that produces income or for figuring out, collecting, or getting a refund for any tax.

Expense Reports

An expense report is a document that lists all the costs a person has paid while doing business. For example, if a business owner travels for a meeting, the cost of their travel, meals, and other things they paid for can be put on an expense report. These costs are then considered business expenses and can often be deducted for taxes.

Many businesses now use special computer systems to manage expense reports. These systems can save time, reduce mistakes, and help prevent fraud.

Managing Your Expenses

Expense management is super important for both individuals and businesses to stay financially healthy. It means tracking, controlling, and making the most of your spending to ensure you have enough money and can grow financially.

For you, managing expenses helps you have a good financial life. By tracking where your money goes, you can see exactly what you spend it on. This helps you make better decisions about budgeting, saving, and even investing. It lets you choose wisely how you spend your money, set financial goals, and avoid getting into unnecessary debt.

For businesses, managing expenses is key to staying strong and succeeding long-term. By watching and controlling costs closely, businesses can spend less on operations and make more profit. Expense management helps them find where they might be spending too much or where they can save money. It also helps them decide how to use their resources, plan investments, and set prices. Good expense management also makes sure businesses follow financial rules and are clear about their money.

In both your personal life and for businesses, managing expenses helps you be financially stable. It prepares you for unexpected costs, emergencies, or tough economic times. By learning good money habits, you can build a strong future. Businesses with good expense management can handle their cash better, which helps them invest, grow, and adapt to changes in the market.

See also

• Amortization (business)
• Balance sheet
• Capital Expenditures
• Cash flow statement
• Depreciation
• Expense management
• Expenses versus Capital Expenditures
• Income statement
• Operating expense
• Per diem
• Stock option expensing