What is an expense?

Published Thursday 23 July 2026

Table of contents

• What is an expense?
• Expense vs expenditure vs cost
• Types of expenses
• Are expenses tax deductible?
• How expenses are recorded: cash basis vs accrual basis
• Why tracking expenses matters
• Manage your expenses easily with Xero
• FAQs on expenses

Key takeaways

• An expense is money or resources flowing out of your business, and it's subtracted from your revenue to work out your profit.
• Expenses come in several types, including deductible vs non-deductible, direct vs indirect, fixed vs variable, and operating (opex) vs capital (capex) vs finance.
• Most business-related expenses are tax deductible, but you can only claim the business portion, so check with the ATO or your accountant.
• You can record expenses on a cash basis or an accrual basis, and tracking them closely protects your profit and cash flow.

What is an expense?

An expense is a payment of cash or other resources flowing out of your business as you run it day to day. On your income statement, expenses are subtracted from your revenue to work out your profit.

Because of that, every dollar you spend affects your bottom line and your overall profitability. Common examples include rent, wages, stock, utilities, insurance and interest on a loan.

Expense vs expenditure vs cost

These three words often get used interchangeably, but they mean slightly different things in accounting. Getting the distinction right helps you read your reports with confidence.

• An expense is a cost you've used up in the current period to earn revenue, and it appears on your income statement.
• An expenditure is any money you spend, whether it's a day-to-day cost or a large one-off purchase like equipment.
• A cost is the amount you pay to acquire something, and it can sit on your balance sheet as an asset until you use it up.

Types of expenses

You can sort expenses in several ways, and the same expense often fits more than one group. Here are the main lenses small business owners use, with everyday Australian examples.

• Deductible expenses are business costs you can claim to reduce your taxable income, such as rent, wages and accounting software.
• Non-deductible expenses can't be claimed against your income, such as private spending, entertainment or fines.
• Direct expenses tie straight to making a product or delivering a service, such as raw materials and the wages of staff who produce your goods.
• Indirect expenses keep the business running but don't attach to one product, such as rent, insurance and admin salaries; these are often called overheads.
• Fixed expenses stay the same from month to month, such as rent, insurance and loan repayments.
• Variable expenses rise and fall with your activity, such as stock, packaging and shipping.

Another way to split expenses looks at their role in the business and where they land in your accounts.

• Operating expenses (opex) are the everyday costs of running your business, such as rent, utilities and marketing.
• Capital expenses (capex) are larger purchases of assets you use over several years, such as vehicles, machinery and computers.
• Finance expenses are the costs of borrowing money, such as interest on a business loan or overdraft.
• Cost of goods sold (COGS) covers the direct costs of producing what you sell, such as materials and production wages.
• Operating expenses sit apart from non-operating expenses, which fall outside your core trading, such as interest and one-off losses.

These types feed into two figures you'll see often. Your gross profit is revenue minus cost of goods sold, and your net profit is what's left after all your other operating expenses and tax.

Are expenses tax deductible?

Most business-related expenses are tax deductible in Australia, which lowers the profit you pay tax on. The catch is that the expense has to be genuinely connected to earning your income.

If something is part business and part private, like your mobile phone or car, you can only claim the business portion, so keep records of how you worked out the split. Common examples of deductible business expenses include:

• rent, utilities and other costs of running your premises
• wages, superannuation and contractor payments
• stock, materials and cost of goods sold
• business insurance, software subscriptions and bank fees

When you're unsure whether a cost qualifies, check the guidance on the ATO website or ask your accountant or bookkeeper.

How expenses are recorded: cash basis vs accrual basis

How you record an expense depends on the accounting method you use. The two main options are cash basis and accrual basis, and the difference comes down to timing.

• On a cash basis, you record an expense when the money actually leaves your account.
• On an accrual basis, you record an expense when you incur it, even if you pay the bill later.

Accrual accounting gives you a more accurate picture of profit in a period, because it matches expenses to the revenue they help earn. Many small businesses start on a cash basis and move to accrual as they grow.

Why tracking expenses matters

Keeping on top of your expenses helps you protect your profit, manage cash flow and spot savings before they become a problem. It also makes tax time far less stressful.

Wages, rent and stock are usually among the biggest costs a small business carries, and they can move over time. According to Xero Small Business Insights, Australian small business wages rose 2.7% year on year in the March quarter of 2026, so it pays to review your largest expenses regularly rather than assuming they stay flat.

Reviewing your expenses often also shows you where to trim without hurting the business, which is one of the most reliable ways to increase your profits.

Manage your expenses easily with Xero

Tracking every expense by hand eats into time you could spend growing your business. Xero brings your bills, receipts and bank transactions together, so you can see where your money goes and keep more of your profit.

Try Xero today and get one month free when you're ready to take control of your expenses.

FAQs on expenses

Here are answers to some frequently asked questions about expenses to help you put it all into practice.

What is the difference between a fixed and variable expense?

A fixed expense stays the same each period, like rent or insurance. A variable expense changes with your activity, like stock or shipping.

What is the difference between an expense and an expenditure?

An expense is a cost you use up in the current period to earn revenue, and it shows on your income statement. An expenditure is any money you spend, including large one-off purchases that become assets.

Is salary an expense?

Yes, salaries and wages are an operating expense and are usually tax deductible. They're often one of the largest costs a small business carries.

Are all business expenses tax deductible?

No, only expenses genuinely connected to earning your income are deductible, so private spending, fines and entertainment generally aren't. For part-business costs you can claim only the business portion, so check with the ATO or your accountant.