What is an expense?

An expense is a cost your business incurs during its normal operations to generate revenue. Examples include rent, salaries, utilities and the cost of goods sold. Expenses are recorded on your income statement, where they reduce your total revenue to arrive at your net profit.

For small businesses, understanding expenses matters because every rand you spend affects your bottom line. Keeping accurate records of your income and expenses helps you see where money is going, control costs and make informed decisions about pricing, hiring and growth.

Expense vs cost vs expenditure vs capital expenditure

These terms overlap but have distinct meanings in accounting.

Cost: the amount paid to acquire something, whether an asset, service or raw material. A cost becomes an expense when you use or consume it.
Expense: a cost that has been used up or consumed in generating revenue during a specific period. It appears on the income statement.
Expenditure: money spent for any purpose, including buying assets. Not all expenditure is an expense right away.
Capital expenditure (CapEx): spending on long-term assets such as machinery, vehicles or property. Rather than expensing the full amount immediately, you spread the cost over the asset's useful life through depreciation.

Understanding the difference helps you record transactions correctly and avoid overstating or understating your profit.

Types of expenses

Business expenses can be grouped in several ways depending on what you need to analyse. Below are the most common classifications.

Operating vs non-operating expenses

Operating expenses are costs directly tied to running your core business, such as rent, wages, utilities and marketing. Non-operating expenses fall outside day-to-day operations. Interest on loans and losses from selling assets are typical examples. Separating the two gives a clearer picture of how profitable your core activities are.

Fixed vs variable expenses

Fixed expenses stay the same regardless of how much you sell. Rent, insurance premiums and fixed salaries are common examples. Variable expenses rise or fall with sales volume, including raw materials, shipping and sales commissions. Knowing which costs are fixed helps you forecast break-even points and plan for slower months.

Direct vs indirect costs

Direct costs can be traced to a specific product or service you sell. For a manufacturer, this includes raw materials and production labour. Indirect costs, often called overheads, support the business as a whole and cannot easily be linked to one product. Office rent, administrative salaries and accounting fees are typical overheads.

Deductible vs non-deductible expenses

Deductible expenses reduce your taxable income when they meet SARS requirements. Non-deductible expenses, such as fines, personal spending and entertainment unrelated to business, cannot be claimed. Recording the two separately simplifies tax filing and avoids rejected claims.

Capital expenses vs operating expenses

Operating expenses cover short-term costs that keep the business running. Capital expenses are longer-term investments in assets that will benefit the business over multiple years. Because CapEx is spread over time through depreciation, it affects your profit gradually rather than in a single period.

Examples of common business expenses

The expenses your business incurs depend on your industry and size, but certain categories appear in most small businesses.

Rent and utilities: monthly payments for premises, electricity, water and internet.
Salaries and wages: compensation for employees, including UIF contributions.
Cost of sales: the direct cost of goods or services sold, such as raw materials or stock purchased for resale.
Marketing and advertising: spending on social media ads, print materials or agency fees.
Professional fees: payments to accountants, lawyers or consultants.
Insurance: cover for premises, vehicles, public liability or professional indemnity.
Depreciation: the portion of an asset's value expensed each period as it wears out.
Travel and transport: fuel, flights, accommodation and vehicle maintenance for business trips.

Pure service businesses may have little or no cost of sales if they do not sell physical goods. Their main expenses tend to be labour, software subscriptions and professional fees.

How expenses work on your financial statements

Expenses appear on the income statement, also known as the profit and loss statement. They are subtracted from revenue to calculate profit. Getting the timing right ensures your reports reflect what actually happened in each period.

Cash vs accrual timing

Under cash accounting, you record an expense when you pay the bill. Under accrual accounting, you record it when you receive the goods or services, regardless of when payment occurs. Most growing businesses use accrual accounting because it matches expenses with the revenue they helped generate.

Expenses and net profit

Revenue minus cost of sales equals gross profit. Subtracting operating expenses, interest and tax from gross profit gives you net profit. Every unnecessary expense chips away at the margin you keep, so tracking spending closely is essential for profitability.

The matching principle

The matching principle requires you to record expenses in the same period as the revenue they helped produce. If you pay for a year of insurance upfront, you spread the cost across 12 months rather than recording it all in month one. This prevents large one-off payments from distorting your monthly profit figures.

Expenses and tax in South Africa

In South Africa, business expenses may reduce your taxable income and VAT liability, provided they meet SARS requirements. Keeping clear records and understanding the rules helps you claim what you are entitled to without triggering queries.

SARS deductibility under section 11(a)

Under section 11(a) of the Income Tax Act, an expense is generally deductible if it was incurred in the production of income. The expense must not be capital in nature and must be laid out for trade purposes. Common deductible items include rent, salaries, utilities and professional fees. Personal expenses, fines and entertainment not directly tied to business generally cannot be claimed.

Claiming input VAT on expenses

If your business is registered for VAT, you may claim back the VAT paid on qualifying purchases, known as input VAT. The standard VAT rate in South Africa is 15%. To claim, you need a valid tax invoice that shows the supplier's VAT number, a description of the goods or services and the VAT amount. Expenses unrelated to taxable supplies, such as staff entertainment or exempt goods, usually do not qualify.

Managing and tracking expenses

Accurate expense tracking protects your profit margin, simplifies tax filing and highlights where you can cut costs. With Stats SA's Annual Financial Statistics showing an average after-tax profit margin of just 1.3% across South African businesses in 2024, even small savings can make a meaningful difference.

Start by recording every transaction as it happens, whether through bank feeds, receipt uploads or manual entry. Categorise expenses consistently so you can spot trends over time. Reviewing your finances and cash flow regularly helps you catch overspending early and adjust before it affects your bottom line.

Automation reduces manual data entry and the errors that come with it. Cloud accounting software can pull in bank transactions, match them to invoices and flag unusual items for review. This gives you a reliable, up-to-date view of your spending without hours of bookkeeping.

Track every business expense with Xero

Staying on top of expenses helps you protect your profit, meet SARS requirements and make confident decisions about your business. With Xero, you can connect your bank accounts, capture receipts on the go and see where your money is going in real time. Ready to simplify your bookkeeping? Get one month free and see how much time you save.

FAQs on expenses

Below are answers to questions small business owners commonly ask about expenses.

Is a salary an expense?

Yes. Salaries paid to employees are operating expenses and appear on your income statement. They reduce your taxable income when incurred for trade purposes.

Is depreciation an expense?

Yes. Depreciation allocates the cost of an asset over its useful life, appearing as a non-cash expense on your income statement each period.

What is the difference between an expense and an expenditure?

An expenditure is any outflow of money, including asset purchases. An expense specifically refers to a cost that has been consumed in generating revenue during a particular period.

Which expenses are tax-deductible in South Africa?

Under section 11(a), expenses incurred in the production of income and not capital in nature are generally deductible. Common examples include rent, salaries, utilities and professional fees.

Can I claim VAT back on all business expenses?

Not all. You may claim input VAT on qualifying purchases related to taxable supplies if you have a valid tax invoice. Personal items, entertainment and exempt goods generally do not qualify.

How do I separate business and personal expenses?

Use a dedicated business bank account and credit card for all business transactions. This makes record-keeping simpler and provides a clear audit trail for SARS.

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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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