Expense

Published Monday 31 August 2026

Table of contents

• What is an expense?
• Examples of common business expenses
• Expense vs expenditure vs cost
• Operating vs non-operating expenses
• Direct vs indirect costs
• Fixed vs variable costs
• Deductible vs non-deductible expenses
• Capital and prepaid expenses
• How expenses are recorded in accounting
• Why categorising expenses matters
• Manage your business expenses with Xero
• FAQs on expenses
• Related terms
• Learn more about expenses

Key takeaways

• An expense is a cost your business incurs to earn income, and it is subtracted from revenue to work out your profit.
• Expenses are grouped in several ways, including operating and non-operating, direct and indirect, and fixed and variable.
• In the Philippines, the BIR only lets you deduct expenses that are ordinary, necessary, incurred in the taxable year, and supported by invoices, official receipts, or other pertinent records.
• Large asset purchases are capitalised and depreciated over time rather than expensed all at once.

What is an expense?

An expense is a cost your business incurs to earn income or keep running. It is recorded on your income statement and subtracted from your revenue to calculate your profit.

In everyday terms, an expense is money flowing out of your business, such as the rent you pay or the wages you give your staff. In accounting terms, it is a cost matched to the period it helped you earn income, so your profit for that period is accurate.

Because expenses sit at the centre of profitability, they are worth understanding well. Getting them right is a core part of small business accounting, and it shapes every report you rely on to run your business.

Examples of common business expenses

Most business expenses fall into a handful of familiar categories. Here are the ones you will meet most often as a small business owner.

• Rent for your premises or storage space
• Salaries, wages, and government-mandated contributions
• Utilities such as electricity, water, and internet
• Advertising and marketing
• Insurance premiums
• Cost of goods sold, meaning the direct cost of what you sell
• Professional fees for accounting and legal help
• Depreciation on equipment and other long-term assets

Recurring costs like these make up the bulk of what you spend, so it pays to track your business expenses from the start.

Expense vs expenditure vs cost

Expense, expenditure, and cost are often used interchangeably, but they mean slightly different things in your accounts. Knowing the difference helps you read your reports with confidence.

• Cost is the amount you pay to acquire something; if it has lasting value, it becomes an asset rather than an immediate expense
• Expenditure is the act of paying out money, whether by cash, card, or bank transfer
• Expense is a cost matched to a period on your profit and loss statement, where it reduces your profit

Take a one-year insurance policy paid upfront. The payment is the expenditure, the amount is the cost, and each month a portion becomes an expense as the cover is used.

Operating vs non-operating expenses

The most common way to split expenses is into operating and non-operating. This distinction shows how much of your spending supports your core business.

• Operating expenses are the day-to-day costs of your main activities, such as rent, wages, utilities, and supplies
• Non-operating expenses sit outside your core operations, such as interest on a business loan or costs from restructuring

Keeping the two apart makes it clear how much profit your core activities actually generate. It is one of the groupings you will record as you keep up with small business bookkeeping.

Direct vs indirect costs

Expenses can also be split by how closely they relate to what you produce. This helps you understand the true cost of your products or services.

• Direct costs are spent specifically on producing goods or services for sale, such as raw materials and production labour
• Indirect costs are the general background costs of running your business, such as office rent and administration

For a bakery, flour and a baker's wages are direct costs, while the accountant's fee is an indirect cost.

Fixed vs variable costs

Another useful lens is whether a cost changes with how busy you are. This grouping helps you plan for quiet and busy periods.

• Fixed costs stay roughly the same no matter your level of activity, such as rent and insurance
• Variable costs rise and fall with your sales or production, such as materials, shipping, and sales commissions

When you know which costs are fixed, you can work out how much you need to sell each month just to cover them.

Deductible vs non-deductible expenses

Some expenses reduce your tax bill and some do not. In the Philippines, the rules on this come from the Bureau of Internal Revenue (BIR).

Under the National Internal Revenue Code (NIRC), you can deduct ordinary and necessary business expenses from your gross income, as long as they are incurred in the taxable year and supported by invoices, official receipts, or other pertinent records. Deducting these costs lowers the profit you pay tax on.

Not every cost qualifies. Common non-deductible items include:

• Personal expenses unrelated to the business
• Fines and penalties
• Undocumented purchases with no receipt or proof of payment

When you are unsure whether something qualifies, check the BIR guidance or speak to a tax professional before you claim it.

Capital and prepaid expenses

A few costs are treated differently from your everyday expenses. Capital and prepaid expenses are the two you are most likely to meet.

• Capital expenses buy or upgrade long-term assets like vehicles, equipment, or fit-outs; instead of claiming the whole amount at once, you capitalise the asset and depreciate it over the years you use it
• Prepaid expenses are paid in advance for something you will receive later, such as annual insurance; they sit on your balance sheet as an asset until you use them up

Treating these correctly keeps your profit figures honest, because the cost is matched to the periods that actually benefit from it.

How expenses are recorded in accounting

Expenses appear on your income statement, where they are subtracted from revenue to work out your profit. When you record them depends on your accounting method.

• Cash basis records an expense when you actually pay it, which is simpler and shows your real cash position
• Accrual basis records an expense when it is incurred and matches it to the revenue it helped earn, which gives a clearer picture of profitability

Either way, the total flows into your income statement, so accurate records lead to reports you can trust.

Why categorising expenses matters

Sorting expenses into clear categories turns a pile of receipts into useful information. It supports three things that matter to every small business.

• Tax compliance: clean categories make it easier to claim the deductions you are entitled to and to prepare accurate returns
• Budgeting: seeing where your money goes helps you set realistic targets and spot costs worth trimming
• Cash flow visibility: knowing your regular outgoings helps you plan for what is coming and avoid shortfalls

Good categories also make it easier to manage your cash flow, so you can see at a glance whether money coming in covers money going out.

Manage your business expenses with Xero

When you can see your expenses clearly, you can decide quickly where to cut costs and where to invest. Xero captures your receipts, sorts each expense into the right category, and updates your reports as money leaves your account, so your profit figures stay current. Get one month free and see how Xero keeps your business expenses in order.

FAQs on expenses

Here are quick answers to questions small business owners often ask about expenses.

Is a salary considered an expense?

Yes. Salaries and wages are operating expenses, and they appear on your income statement in the period the work is done.

Are all business expenses tax-deductible in the Philippines?

No. The BIR only allows deductions for expenses that are ordinary, necessary, incurred in the taxable year, and supported by invoices or official receipts, so personal or undocumented costs are excluded.

What is the difference between an expense and a liability?

An expense is a cost used up to earn income in a period, while a liability is money you still owe, such as an unpaid supplier bill or a loan balance.

What counts as a business expense for a small business?

Any cost you incur to run the business and earn income counts, from rent and wages to supplies and software, as long as it is not a personal cost.

Related terms

• Assets
• Liabilities
• Capital
• Gross profit
• Cash flow

Learn more about expenses

• Expense management with Xero
• How to manage petty cash
• How to increase profitability
• How to measure profitability
• How to create a cash flow forecast