Expense

Published Thursday 23 July 2026

Table of contents

• What is an expense?
• Expense vs cost vs expenditure
• The main types of expenses
• Examples of common business expenses
• How expenses are recorded
• Why tracking expenses matters
• 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, so it’s a resource that flows out of the business.
• Accountants group expenses in different ways, such as deductible or non-deductible, direct or indirect, and fixed or variable.
• Expenses sit on your income statement as deductions from revenue, which is what turns revenue into profit.
• Tracking your expenses accurately helps you understand profitability and make more confident decisions.

What is an expense?

An expense is a cost your business incurs to earn revenue. Put simply, expenses are the resources that flow out of a business.

The basic idea is straightforward, but expenses are central to profitability, so accountants look at them through a few different lenses. Each lens answers a different question about what you’re spending and why.

Expense vs cost vs expenditure

These 3 words often get used interchangeably, but they mean slightly different things. Knowing the difference helps you read your accounts with more confidence.

A cost is the amount you pay for something. That cost becomes an expense when the item is used up to help generate revenue in a given period.

Expenditure is simply money spent. Capital expenditure is money spent to buy long-term assets, such as equipment or vehicles, that you use over several years rather than consume straight away.

The main types of expenses

Accountants categorise expenses in several ways, and each grouping tells you something useful about your spending. Here are the 4 most common ways to look at them.

Deductible vs non-deductible expenses

Deductible expenses reduce your taxable profit, while non-deductible expenses don’t. Inland Revenue (IRD) has rules on what is and isn’t deductible, so it’s worth checking how each cost is treated.

• Deductible: costs you can subtract from revenue to lower your taxable profit, such as rent or stock
• Non-deductible: costs you can’t use to reduce tax, such as private spending or certain entertainment

You may also be able to claim GST on many business expenses, so it helps to understand how to claim GST back where it applies.

Direct vs indirect costs

Direct costs are tied to producing your goods or services, while indirect costs keep the business running in the background. Indirect costs are often called overheads.

• Direct: costs linked to making a product or delivering a service, such as raw materials or wages for production staff
• Indirect: background running costs that support the whole business, such as rent, insurance, or admin salaries

Fixed vs variable costs

Fixed costs stay the same regardless of how busy you are, while variable costs rise and fall with your level of activity. Most businesses have a mix of both.

• Fixed: costs that don’t change with output, such as rent, insurance, or salaried wages
• Variable: costs that go up or down with activity, such as raw materials, packaging, or shipping

Operating, capital and finance expenses

This lens splits spending by its purpose in your business. It separates day-to-day running costs from long-term investments and the cost of funding.

• Operating expenses (opex): the day-to-day costs of running the business, such as utilities and wages
• Capital expenses: investments in long-term assets, such as property, vehicles, or equipment
• Finance expenses: loan repayments, interest, and distributions of profit to shareholders

Long-term asset purchases are also known as capital expenditure (capex), which sits apart from your everyday operating spend.

Examples of common business expenses

Most businesses share a core set of everyday expenses. Here are some of the most common ones you’ll come across.

• Rent for premises or a workspace
• Wages and salaries for staff
• Utilities such as power, water, and internet
• Insurance to cover the business and its assets
• Stock or inventory you buy to sell on
• Marketing and advertising
• Depreciation on assets as they lose value over time

How expenses are recorded

How you record an expense depends on the accounting method you use. The 2 main options are cash basis and accrual basis.

On a cash basis, you record an expense when the money actually leaves your bank account. On an accrual basis, you record it when the cost is incurred, even if you haven’t paid yet.

Either way, expenses appear on your income statement as deductions from revenue. Subtracting your expenses from revenue is what gives you your profit for the period.

Why tracking expenses matters

Your expenses directly shape your profit, so keeping accurate records gives you a clear picture of how the business is performing. When you know where your money goes, you can spot where to trim costs and where to invest.

Good expense records also make tax time simpler and help you claim everything you’re entitled to. They give you the real-time visibility you need to make confident decisions throughout the year.

Manage expenses easily with Xero

Xero brings your spending and expense claims together in one place, so you can see where your money goes without the manual admin. You can capture receipts, categorise costs, and keep everything ready for tax time.

Ready to take control of your expenses? You can get one month free when you choose a plan that suits your business.

FAQs on expenses

Here are answers to some frequently asked questions about expenses to help clear up the common points of confusion.

What is an expense in accounting?

An expense is a cost your business incurs to earn revenue over a given period. It’s recorded on your income statement and subtracted from revenue to work out profit.

What is the difference between an expense and a cost?

A cost is the amount you pay to acquire something. It becomes an expense once that item is used up to help generate revenue.

What is the difference between an expense and an expenditure?

An expenditure is money spent, often on long-term assets you use over several years. An expense is a cost consumed within the current period and matched against revenue.

Are all business expenses tax deductible in New Zealand?

No, only deductible expenses reduce your taxable profit, while non-deductible ones don’t. Inland Revenue (IRD) sets the rules on which costs you can and can’t claim.

How are expenses recorded in accounting?

Expenses are recorded on either a cash basis, when money leaves your account, or an accrual basis, when the cost is incurred. In both cases they appear on the income statement as deductions from revenue.

Related terms

• Operating expense
• Capital expenditure
• Opex vs capex
• Fixed cost
• Variable cost
• Overhead

Learn more about expenses

• Managing overhead costs
• Cost of goods sold
• Business cost-saving ideas
• How to measure profitability