Expense
Learn what an expense is, how expenses work in accounting, and which ones are tax-deductible in Malaysia.
Published Wednesday 30 September 2026
Table of contents
Key takeaways
- An expense is a cost your business uses up to earn income, and it reduces your profit for the period it relates to
- Expenses appear on your profit and loss statement, and cash or accrual accounting decides when each one is recorded
- In Malaysia, a business expense is generally tax-deductible when it’s wholly and exclusively incurred in producing gross income under the Income Tax Act 1967
- Keeping receipts, categorising costs and reviewing them each month makes tax time easier and shows you where to save
What is an expense?
An expense is a cost your business pays or owes to run its operations and earn income. Rent, wages and electricity bills are everyday examples.
In formal accounting terms, the International Financial Reporting Standards (IFRS) Conceptual Framework describes expenses as decreases in assets or increases in liabilities that reduce equity. Money paid out to owners, such as dividends, sits outside this definition.
Picture a shop owner who pays a RM800 electricity bill. Cash in the bank (an asset) goes down and the owner’s equity falls by the same amount, so the payment is an expense.
How expenses work in accounting
Expenses are recorded on your income statement, also called the profit and loss statement. Your profit is what’s left after you subtract expenses from your sales revenue.
Accountants follow the matching principle, which records expenses in the same period as the revenue they help earn. That way, each month’s profit shows what it really cost to make that month’s sales.
The exact timing of an entry depends on your accounting method. With cash accounting, you record an expense when money leaves your account. With accrual accounting, you record it when you receive the goods or services, even if you pay later.
Say you receive a RM600 internet bill in June and pay it in July. Cash accounting records the expense in July, while accrual accounting records it in June.
Examples of business expenses
Most small businesses pay a similar mix of costs, whatever their industry. Here are some common business expenses you’re likely to see.
- Rent for your shop or office
- Salaries, wages and employer contributions to the Employees Provident Fund (EPF)
- Utilities such as electricity and internet
- Stock and materials used to make the goods you sell
- Marketing and advertising
- Depreciation on equipment and vehicles
- Interest on business loans
Small, one-off costs like parking or courier fees count as expenses too. Many businesses pay these from a petty cash float.
Types of expenses
Accountants group expenses in several ways, because each view answers a different question about your business. Here are four of the most useful.
Deductible vs non-deductible expenses
Deductible expenses are subtracted from your revenue when you work out taxable profit, which lowers your tax bill. Non-deductible expenses still reduce your accounting profit, but tax rules leave them out of the taxable profit calculation.
Direct vs indirect costs
Direct costs are spent specifically on producing the goods or services you sell, such as raw materials or a contractor hired for one job. Indirect costs, often called overheads, keep the whole business running, such as rent and accounting fees.
Fixed vs variable expenses
Fixed expenses stay roughly the same however busy you are, such as a monthly lease. Variable expenses rise and fall with activity, such as packaging or delivery costs.
A bakery pays the same rent in a quiet week as during the Hari Raya rush. It spends more on flour and boxes when orders spike, though. Knowing the split helps you plan for slower months.
Operating vs non-operating expenses
Operating expenses come from your core day-to-day activities, like wages and marketing. Non-operating expenses sit outside those activities, such as loan interest or a loss on selling old equipment.
Separating the two shows how profitable your main business is on its own.
Tax-deductible expenses in Malaysia
In Malaysia, the Inland Revenue Board of Malaysia (LHDN) applies the Income Tax Act 1967 to decide which business expenses reduce your taxable income. Two sections do most of the work.
Section 33(1) sets the general test: an expense qualifies when it’s wholly and exclusively incurred in the production of gross income. Section 39 then lists prohibited deductions, including private or domestic spending and capital costs. An expense needs to pass the first test and stay clear of the second list.
For example, a machine you buy is a capital cost, so you claim relief through capital allowances instead of a full deduction. A phone plan shared between family and business use may fail the wholly and exclusively test. This guide to deductible expenses under the Income Tax Act 1967 explains both sections in more detail.
Every business has its own mix of costs, so it pays to check your claims with a professional. You can find a local accountant or bookkeeper who knows Malaysian tax rules.
Expense vs expenditure
Expenditure is any money your business spends, while an expense is the part used up within the current period. Most day-to-day spending, like rent and wages, is both.
Capital expenditure works differently. A RM80,000 delivery van goes on your balance sheet as an asset, and you depreciate it over the years you use it. Each year’s depreciation then becomes an expense on your profit and loss statement.
How to track and manage business expenses
A simple routine keeps your records accurate and makes tax time easier. Follow these steps to stay on top of your spending.
- Keep every receipt and invoice, and store digital copies so they’re easy to find
- Log each cost promptly, using a consistent way to record your transactions
- Categorise expenses into accounts such as rent and marketing
- Set a clear process for staff expense claims so employees are reimbursed quickly and accurately
- Track supplier bills through your accounts payable process so you pay on time
- Review your expenses each month against your budget to spot rising costs early
Manage your business expenses with Xero
When you understand your expenses, you can claim the right deductions and protect your profit. Xero brings your bank feeds and receipts together, so your costs are ready to categorise and review in one place.
Your team can capture receipts and submit spending for approval with Xero expense claims. Choose a plan today and get one month free.
FAQs on expenses
Here are answers to common questions about expenses that go beyond the basics.
What is a prepaid expense?
A prepaid expense is a cost you pay before you receive the benefit, such as a year of insurance paid upfront. Under accrual accounting, you record it as an asset first, then move it into expenses month by month.
Is an expense a liability?
An expense reduces your profit, while a liability is an amount you still owe. An unpaid supplier bill creates both until you pay it.
Can employees be reimbursed for business expenses?
Yes, when employees pay for approved business costs themselves, you can repay them through an expense claim. Keep the receipt with each claim so you record the cost as a business expense, separate from their salary.
What’s the difference between an expense and a cost?
A cost is the amount you pay to acquire something, while an expense is a cost used up to earn revenue in a period. Stock you buy is a cost held as inventory, and it becomes an expense when you sell it.
Related terms
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Disclaimer
This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.