Characteristics of Expenses

Characteristics of Expenses

Expenses are incurred to finance day to day operations of the entity and these expenses reduce the equity. Expenses are costs incurred to generate profits. Thus we can say that expenses are cost of doing business.

Important Characteristics of Expenses

Some important characteristic of expenses have been explained below.

1.   Support operations

Expenses are incurred to run day to day operations of the entity. This is the most important characteristic or function of the expenses. Thus Expenses is one of the most important factors for the existence of the business.

2.   Generate profit

Another important characteristic of expense is profit generation. For example the cost of sales being as expense is incurred to generate revenue and profit. Production & selling both are technically not possible without incurring expenditure.

3.   Statement of Comprehensive Income

Expenses are shown in statement of comprehensive income. Expenses are shown in the first part of statement of comprehensive income, other part of comprehensive income deals financial items of special nature like gain on disposal of income.

4.   Reduce Equity

An expense reduces the equity of the entity. In practice accounting, expenses are not directly charged to equity, rather it is first charged to income statement and then net income is charged to equity. Thus net income reduces the equity.

5.   Equity Holder Distribution

Distribution to equity holder like dividend is not considered expense of the company. Similarly the contribution of equity holder does not consider the income of the company or entity. Thus both distribution and contribution to the equity does not form part of income statement.

6.   Capital & Revenue Expenditure

Expenses can be classified into capital and revenue expenses. Those expenses that provide short term benefit are called revenue expenses like salary , rent, etc, while those expenses which benefit is to be exhausted/received in long run are called capital expenses like purchase of machinery etc.

7.   Break Down Expenses

Typically the expenses can be break down into following main classes. Each of this class may have different type of function. This classification is also known as break down by function.

a.    Marketing & Selling Expenses

b.    Cost of sales expenses

c.    Factory overhead expenses.

d.    Finance Expenses

Expenses may also be classified in term of their nature.

a.    Deprecation.

b.    Material Expenses.

c.    Employee’s salary.

8.   Recognition of Expenses

Expenses are recognized in book subject to fulfillment of following conditions

a.    Expenses satisfy the definition.

b.    Economic associated with expense will flow to organization.

c.    Expense can be measured reliably.

List of important Characteristics of Expenses

Some important characteristics of expenses are listed below

a.    Expenses are facilitates operations.

b.    Expenses facilitate income generation.

c.    Expenses provide long and long term benefit.

d.    An expense reduces the equity of the company.

e.    A distribution to equity holder is not an expense.