What is an expense?

Published Thursday 23 July 2026

Table of contents

• What is an expense?
• Expense vs cost: what's the difference?
• Common examples of business expenses
• The main types of expenses
• How are expenses recorded?
• How to manage your business expenses
• Manage your business expenses with Xero
• FAQs on expenses

Key takeaways

• An expense is a payment made in cash or other resources, such as time, that flows out of your business as part of running it.
• All expenses are costs, but not all costs are expenses: buying a van is a cost, while the fuel and servicing are expenses.
• Accountants group expenses in several ways, including deductible against non-deductible, direct against indirect, and fixed against variable.
• Expenses appear on your profit and loss statement and reduce your profit, so tracking them clearly helps you understand how your business is performing.

What is an expense?

An expense is a payment made in the form of cash or other resources, such as time. In short, expenses are resources flowing out of your business.

The basic principle is simple, but expenses sit at the heart of your profitability. That's why accountants look at them through several different lenses, which you'll find further down this guide.

Expense vs cost: what's the difference?

People often use "cost" and "expense" to mean the same thing, but there's a useful distinction. All expenses are costs, yet not all costs are expenses.

Take a delivery van as an example. Buying the van is a cost, because it's money spent to acquire an asset. The fuel, insurance and servicing you pay to keep it running are expenses, because they're used up as part of day-to-day trading.

Common examples of business expenses

Expenses cover most of the regular payments you make to keep trading. Here are some concrete examples you're likely to recognise:

• Rent for premises or a workspace
• Staff wages and salaries
• Utility bills, such as gas, electricity and water
• Stock or cost of goods sold
• Advertising and marketing
• Software subscriptions
• Business insurance

The main types of expenses

Because expenses are so central to profitability, accountants categorise them in several ways. The four lenses below give you different views of the same spending, and it helps to keep your cash flow in mind as you read them.

Deductible vs non-deductible expenses

This lens looks at how expenses affect the tax you pay. HMRC decides what counts as allowable, and deductible expenses reduce your taxable profit.

• Deductible expenses are subtracted from revenue to reduce taxable profit
• Non-deductible expenses can't be used to reduce your tax liability

To work out what you can claim, check the current rules on allowable expenses.

Direct vs indirect costs

This lens separates spending tied to what you sell from the wider costs of trading. It's a useful way to see how much each product or service really costs you.

• Direct costs are amounts spent specifically on producing goods or services for sale
• Indirect costs are the background costs of running the business

Fixed vs variable costs

This lens focuses on how your costs respond when trade speeds up or slows down. Knowing the split helps you plan for quieter periods.

• Fixed costs stay roughly the same however busy or slow your business is
• Variable costs rise when you're busy and fall when you're not

Operating, capital and finance expenses

This lens groups expenses by their role in the business, from everyday running costs to longer-term investment. One of these, the operating expense, covers the costs you meet just to keep trading.

• Operating expenses are the day-to-day costs of being in business
• Capital expenses are investments in property and tools that let you do your work
• Finance expenses are loan repayments or the disbursement of profits to shareholders

How are expenses recorded?

Expenses appear on your profit and loss statement, also called the income statement, where they reduce your profit for the period. Recording them accurately shows you how much it really costs to run your business.

You record an expense when the cost is used up, matching it to the revenue it helped you earn. So the servicing on that delivery van is recorded in the period the work is done, not whenever the invoice happens to arrive.

How to manage your business expenses

Staying on top of expenses gives you a clearer picture of your margins and helps you make confident decisions. According to Xero Small Business Insights, UK small business margins have been squeezed by energy and finance costs through the March quarter 2026, with petrol prices up 15% in March.

A few simple habits make expenses far easier to manage. Try to build these into your routine:

• Track spending regularly rather than leaving it until year end
• Keep records and receipts for every payment you make
• Categorise costs so you can see where your money goes
• Review your figures often to spot trends and act early

Good tools take the manual work out of these habits. You can find practical steps for how to track business expenses, or use expense management software to capture and categorise costs as you go.

Manage your business expenses with Xero

Clear, well-managed expenses are the foundation of a healthy profit margin, and the right software keeps them organised without the paperwork. Xero brings your finances together in one place so you can capture costs, categorise them and see your profit clearly.

Spend less time on manual admin and more time running your business: try Xero to bring your finances together in one place and get one month free.

FAQs on expenses

Here are answers to frequently asked questions about expenses.

What is an example of an expense?

Rent, staff wages and utility bills are all common examples. Each is a regular payment used up as part of running your business.

What is the difference between an expense and an asset?

An asset is something your business owns that holds value over time, such as equipment or a vehicle. An expense is money used up in the current period, so it's consumed rather than kept.

Are all business expenses tax deductible?

No, only expenses HMRC treats as allowable can reduce your taxable profit. Anything classed as non-deductible can't be used to lower your tax bill.

What is the difference between an expense and an expenditure?

Expenditure is the broader term for any money your business spends, including on assets. An expense is the portion of that spending used up in day-to-day trading.

How do you record an expense?

You record it on your profit and loss statement in the period the cost is used up. Matching it to the revenue it helped earn keeps your profit figure accurate.