What is Expense? 3-28-16

WHAT IS EXPENSE?

Those involved in the business industry are often challenged by the complexities associated with understanding accounting records. Without a reference of value to numbers printed within a report, a lack of communication between operations and decision makers exists. QuickBooks simplifies the accounting structure with user-friendly interfaces and familiar documents, such as checks and bills; however, to gain further advantage in any industry, users of accounting records should gain knowledge on at least one particularly important topic: expenses.

What Are Expenses?

The traditional use of the word ‘expense’ commonly refers to a simple equation: cash out for an item or service. Transactions enclosed in bank and credit card statements often symbolize the extent of knowledge necessary for the common person regarding expense; however, within accounting, expense has a slightly different definition. Accounting expenses are more broadly referred to as an outflow of either cash or assets (items of significant value to the company, such as accounts receivable, inventory, investments, etc.) from one entity or person to another. These expenses require the decrease of assets or an increase in liabilities (accounts payable, loans, or other debt instruments), in exchange for an economic benefit. Without the fulfillment of these requirements, an expense cannot be recognized.

An additional complexity occurs within accounting expenses: capitalization. When an accounting expenditure falls in a bracket of cost below a predetermined level of materiality (or threshold amount of cost) for a particular company, it is normally accounted for as an expense and is reported within a business’s operations on the income statement. Accounting expenditures that fall at or above materiality, however, may be capitalized, and the full cost is not immediately expensed and shown within the business’s operation expenses. Capitalized expenditures are depreciated (decreased in value according to a chosen method of cost reduction) and expensed over time, and show up as an asset for a company. Capitalized assets may include inventory, equipment, furniture and vehicles, computers and printers, and other functional items used within the business.

How Are Expenses Accounted For Within QuickBooks?

The development of QuickBooks software to include a variety of screens mimicking common forms used within a business’s transactions aids in the entry of transactions, and can also be used to understand how expenses flow within the books. To account for the variety of different expenses, QuickBooks organizes transactions within accounts that may be customized for the user, depending on need; for instance, all expenses associated with rent go to the Rent Expense account, just as all office supplies may be expensed in the Office Supplies Expense account. This list of accounts (also including all income and balance sheet accounts for a business) is referred to as the Chart of Accounts within QuickBooks.

Transaction screens, such as Bills and Write Checks, include a space to categorize expenses from a drop-down screen including all applicable accounts from the Chart of Accounts. During the entry process, the user enters all applicable data; upon saving, the expense is recorded in the related account.