Expense

Published Thursday 23 July 2026

Table of contents

• What is an expense?
• Expense vs expenditure vs cost
• How expenses are recorded
• The main types of expenses
• Examples of common business expenses
• Deductible expenses and the CRA
• Manage expenses easily with Xero
• FAQs on expenses
• Related terms
• Learn more about expenses

Key takeaways

• An expense is a cost your business incurs to earn revenue, money or resources flowing out of your business.
• An expense isn’t quite the same as an expenditure or a cost: an expenditure is any money you spend, while an expense is the portion recorded against a specific period.
• You can group expenses in a few ways: deductible or non-deductible, direct or indirect, fixed or variable, and operating, capital or finance.
• The Canada Revenue Agency lets you deduct reasonable expenses you incur to earn business income, but personal expenses aren’t deductible.

What is an expense?

An expense is a cost your business incurs to earn revenue. It’s money or resources flowing out of your business to keep it running and bring income in.

Rent, wages, and the electricity bill are all expenses. Recording them accurately shows you what it really costs to run your business and how much profit you keep.

Expense vs expenditure vs cost

People often use expense, expenditure, and cost interchangeably, but each one means something specific in accounting. Here’s how they differ:

• Expense: a cost recorded against the revenue it helped earn in a given period
• Expenditure: any money you spend, whether on day-to-day running costs or long-term assets
• Cost: the amount you pay to acquire something, which may become an expense over time

So buying a delivery van is an expenditure, and the yearly depreciation you record for it is an expense.

How expenses are recorded

How you record an expense depends on your accounting method, and the timing can change the picture your reports show. The main approaches are cash and accrual accounting.

Under the cash method, you record an expense when you actually pay it. Under the accrual method, you record it when it’s incurred, even if the payment comes later.

The matching principle sits behind accrual accounting. It says you should record an expense in the same period as the revenue it helped generate, so your profit figures reflect what really happened.

The main types of expenses

You can look at expenses through a few different lenses, and each one answers a common question about how a cost behaves or how it’s treated. The comparisons below cover the ones you’ll meet most often.

Deductible vs non-deductible expenses

A deductible expense is one you can subtract from your business income to lower your taxable profit, while a non-deductible expense can’t be subtracted. Most reasonable costs of running your business are deductible, but personal spending and a few other items aren’t.

Direct vs indirect costs

A direct cost is one you can trace straight to a specific product or service, while an indirect cost supports the business as a whole. Cost of goods sold is a common example of a direct cost.

Indirect costs are often called overhead: the fixed background costs like rent and administration that keep the business running without tying to a single product.

Fixed vs variable costs

A fixed cost stays the same no matter how much you produce or sell, while a variable cost rises and falls with your activity. Rent is a fixed cost, and raw materials are a variable cost.

Operating vs capital vs finance expenses (opex vs capex)

An operating expense (opex) is a day-to-day running cost, a capital expenditure (capex) is money spent on long-term fixed assets, and a finance expense is the cost of borrowing, such as interest. The opex vs capex split matters because you treat each one differently in your accounts and at tax time.

Examples of common business expenses

Most businesses share a core set of everyday expenses. Here are some of the most common ones:

• Rent
• Wages and salaries
• Utilities
• Advertising and marketing
• Office supplies
• Insurance
• Cost of goods sold

Deductible expenses and the CRA

For Canadian small businesses, how an expense is treated at tax time can matter as much as the amount. The Canada Revenue Agency (CRA) sets the rules for what you can deduct.

The CRA lets you deduct reasonable expenses you incur to earn business income. Personal expenses aren’t deductible, and some costs are only partly deductible or claimed over several years.

Keeping clear records makes claiming expenses at tax time far simpler. If you run your business from home, the CRA has specific rules for business-use-of-home expenses.

Manage expenses easily with Xero

Tracking every expense by hand eats into time you’d rather spend running your business. Xero brings your costs together in one place, so you can capture receipts, categorize spending, and see where your money goes when you get one month free.

FAQs on expenses

Here are answers to some frequently asked questions about expenses.

Is salary an expense?

Yes. The salaries and wages you pay employees are an operating expense, recorded in the period the work is done.

What is the difference between an expense and an expenditure?

An expenditure is any money you spend, while an expense is the portion of that spending recorded against a specific accounting period. Buying equipment is an expenditure; the yearly depreciation you record for it is an expense.

What are the main types of expenses?

Expenses are commonly grouped as deductible or non-deductible, direct or indirect, fixed or variable, and operating, capital or finance. Which grouping you use depends on whether you’re looking at tax, product costing, or budgeting.

Are all business expenses tax deductible in Canada?

No. The CRA only lets you deduct reasonable expenses incurred to earn business income, so personal expenses stay off the list.

Related terms

• Operating expense
• Capital expenditure
• Fixed assets
• Cash vs accrual accounting

Learn more about expenses

• Small business expenses
• Business cost saving ideas
• Cash vs accrual accounting