7.4 Expense
7.4.1 Introduction
Expenses are 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.
An expense always causes a decrease in owners’ equity. The related changes in the accounting equation can be either (1) a decrease in assets, or (2) an increase in liabilities.
7.5.2 Expense Recognition
An expense will give rise to economic sacrifices to the business. In order for an item to be recorded as an expense it must meet the general criteria:
meet the definition of expenses
have a valid measurement basis and amount.
7.5.3 Categories of Expense
Direct expenses are expenses, such as cost of goods sold, that are associated directly with revenues.
Indirect expenses are expenditures such as interest costs and administrative salaries, which are not associated directly with a product or service. These are often called period expenses.
7.5.4 Specific Expense Items
1. Cost of Goods Sold
Cost of goods sold = Opening Inventory + Purchases - Ending Inventory
2. Depreciation Expense
Depreciation is the allocation of the depreciable amount of an asset over its estimated useful life.
The most common depreciation methods include the
straight-line method
units of production method
declining balance method
sum-of-the-years-digits method
Dr Depreciation expense xxx
Cr Accumulated depreciation xxx
3. Period expense
Operating expenses are expenses incurred during the sales process, including freight charges, insurance, advertising expense, etc.
Administrative expenses are expenses incurred in organizing and managing the operating activities of an enterprise.
Finance expenses are expenses incurred by an enterprise in raising funds required for operations. Finance expenses include interest expenses that should be included as period costs, exchange losses, and other relevant handling charges.
