Glossary
Expense
A cost the business incurs in order to earn its revenue.
What it means
The cost of goods and services consumed in the process of generating revenue during a period.
Example
Rent, wages and electricity are expenses.
Why it matters
Expenses are deducted from revenue in the income statement to arrive at profit for the year.
In practice
An expense is a debit balance in its own account in the nominal ledger. At the year end it is transferred to the debit side of the income statement, which reduces profit.
Only expenses for the current period belong there. Anything paid in advance is carried forward as a prepayment (a current asset). Amounts still owing are added as an accrual (a current liability). Suppose a shop pays RM3,600 for a year of insurance on 1 October, and its year ends on 31 December. Only RM900 is an expense for those three months. The other RM2,700 appears in the statement of financial position as a prepaid expense.
Students often confuse an expense with capital expenditure. An expense (revenue expenditure) is used up in running the business and is written off in full against this year's profit. Capital expenditure buys or improves a non-current asset that serves for several years. It is recorded in the statement of financial position and charged gradually through depreciation. Treating a machine purchase as an expense, or repairs as an asset, misstates both profit and assets.
If you struggle to sort payments into these two groups, one of our teachers can work through past-paper examples with you. Book a trial class.
Related terms
Definitions here are general accounting explanations for study. For your board's exact wording, see its official syllabus via Sources.
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