An expense is a payment made in the form of cash or other resources such as time. Accountants categorize expenses in many ways.
The basic principle of an expense is simple enough. They are resources flowing out of a business. However, because expenses are so central to profitability, accountants look at them through lots of different lenses.
Four different ways to look at expenses
1. Deductible expenses versus non-deductible expenses
- Deductible expenses are subtracted from revenue to reduce profits (and therefore tax liability)
- Non-deductible expenses can’t be used to reduce tax liability
The IRS has rules about what is and isn’t deductible.
2. Direct costs vs indirect costs
- Direct costs are amounts spent specifically on producing goods or services for sale
- Indirect costs are all the other background costs of running a business
3. Fixed costs vs variable costs
- Fixed costs stay roughly the same no matter how busy or slow your business is
- Variable costs go up when you are busy
4. Operating expenses vs capital expenses vs finance expenses
- Operating expenses are the day to day costs of being in business
- Capital expenses are investments in properties and tools that allow you to do your work
- Finance expenses are loan repayments and/or disbursement of profits to shareholders
See related terms
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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.