What is an expense?

An expense is a payment your business makes in cash or other resources, such as time, to earn income. Expenses flow out of your business and reduce the profit shown on your profit and loss statement.

Picture a café. Its coffee beans and monthly rent are both expenses, because each uses up money to keep the café serving customers.

Because expenses shape your profit so directly, accountants group them in several ways. Each grouping helps you make a different kind of business decision.

Expense vs expenses

In the singular, expense usually means one cost or the general idea of spending money. The plural, expenses, usually means the total of those costs over a period, such as a month or a financial year.

On your profit and loss statement, the expenses section groups these costs so you can compare them with revenue. Expense also works as a verb, which is covered in the section on expensing vs capitalising.

Examples of business expenses

Most small businesses in Singapore pay a similar set of everyday costs. Here are common ones you’ll likely see in your accounts:

Rent for your office or shop
Staff salaries and statutory Central Provident Fund (CPF) contributions
Utilities such as electricity and water
Advertising and marketing
Accounting and bookkeeping fees
Bank charges
Software subscriptions

Each of these costs can be sorted in more than one way, depending on the question you’re asking about your business.

4 ways to classify expenses

Accountants use four main lenses to classify expenses. The same cost can sit in a different group under each lens.

1. Deductible vs non-deductible expenses

This lens sorts expenses by how they’re treated for tax. Deductible expenses lower the income your business pays tax on, and non-deductible ones stay in that calculation.

The Singapore rules for this lens are covered in the next section.

2. Direct vs indirect costs

Direct costs are what you spend to produce the goods or services you sell, and they make up your cost of goods sold. Indirect costs are the background costs of running the business, such as insurance or accounting software.

For a bakery, flour is a direct cost and the shop’s insurance is an indirect cost.

3. Fixed vs variable costs

Fixed costs stay roughly the same however busy or quiet your business is, like rent or insurance. Variable costs rise when you’re busy and fall when you’re quiet, like packaging or delivery fees.

Knowing the split helps you work out how much you need to sell each month to cover your costs.

4. Operating vs capital vs finance expenses

Operating expenses are the day-to-day costs of being in business, such as rent and wages. Capital expenditure is spending on property or equipment you’ll use for years.

Finance expenses are the costs of borrowing, such as interest on a business loan or overdraft. Repaying loan principal reduces a liability, so it goes on your balance sheet instead of your profit and loss statement. Dividends share profit with shareholders, so they sit outside your expenses too.

Deductible vs non-deductible expenses in Singapore

A deductible expense lowers your company’s taxable income. To qualify, it must meet all four conditions in the IRAS business expense rules:

Incurred solely to earn income for the business
Already incurred, meaning you’re legally liable to pay it, even if you haven’t paid yet
Revenue in nature, such as a running cost, rather than a capital purchase
Permitted as a deduction under the Income Tax Act 1947

IRAS lists accounting fees, advertising, bank charges and statutory CPF contributions among the expenses that are generally deductible. By contrast, IRAS treats these costs as non-deductible:

Personal expenses, such as travel or entertainment that isn’t fully related to the business
Capital costs, such as incorporating a company or buying fixed assets
Voluntary CPF contributions above the statutory rate
A certificate of entitlement (COE) for a motor vehicle

For costs that fall in a grey area, IRAS offers a Business Expense Deductibility Checker you can use to test each item.

Expensing vs capitalising a cost

To expense a cost means recording the full amount on your profit and loss statement in the period you incur it. Most everyday spending, like stationery or a software subscription, is expensed straight away.

Larger purchases you’ll use for years, such as kitchen equipment or computers, are capitalised instead. You record them as assets on your balance sheet and spread their cost over their useful life through depreciation.

Tax follows its own rules here. With IRAS capital allowances, companies claim on qualifying fixed assets used in their business, called plant and machinery, instead of expensing the cost.

Under the IRAS low-value asset rule, you can write off items up to $5,000 each in one year, capped at $30,000 per Year of Assessment.

How to track and manage business expenses

Good expense habits make tax season quicker and show you where your money goes. Start with these five steps.

1. Keep every receipt

Save a receipt or invoice for each business purchase, including small cash payments. A simple petty cash system helps you log those minor costs as they happen.

2. Separate business and personal spending

Use a dedicated business bank account and card for business costs only. Clean records make it easier to show which expenses meet the IRAS conditions.

3. Categorise expenses consistently

Pick a set of expense categories, such as marketing or software, and use them every time. Consistent categories let you compare spending month to month and spot patterns quickly.

4. Set up a process for employee expense claims

When staff pay for business costs themselves, they need a clear way to get the money back. Set out what’s claimable and how staff submit receipts for approval, then use online expense claims to keep everything in one place.

5. Review your expenses every month

Set aside time each month to compare your expenses with the previous month and your budget. Regular reviews help you catch duplicate charges and unused subscriptions early.

Keep track of your expenses with Xero

Knowing where your money goes helps you protect your profit and claim the right deductions. Xero cuts hours off your bookkeeping with automated bank feeds and easy document uploads, so your expense records stay up to date.

Your reports then show spending in real time, ready to share with your accountant. Pick the plan that suits your business and get one month free.

FAQs on expenses

Here are answers to other common questions small business owners ask about expenses.

Is an expense the same as an expenditure?

Expenditure is any spending, including on long-term assets, while an expense is the part charged against profit in a given period. Buying equipment is expenditure, and its yearly depreciation is the expense.

What is a prepaid expense?

A prepaid expense is a cost you pay in advance, such as a year of insurance. You record it as an asset and expense it gradually over the months it covers.

What is an accrued expense?

An accrued expense is a cost you’ve incurred before paying or being billed for it, such as December electricity invoiced in January. Recording it in the right month keeps your profit accurate.

Is an expense the same as a liability?

An expense reduces profit, while a liability is money your business owes. An unpaid supplier bill is both: an expense on your profit and loss statement and a liability in accounts payable until you pay it.

What expenses can employees claim?

Employees can usually claim business costs they’ve paid personally, such as travel to client meetings or work supplies, when your policy allows it. A receipt and a short note on the business purpose make each claim quicker to approve.

Can an expense be both fixed and variable?

Yes, these are called semi-variable costs. A phone plan with a set monthly fee plus charges for extra data is one example.

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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.

What is an expense?

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