Topics: Generally Accepted Accounting Principles, Depreciation, Revenue Pages: 12 (3867 words) Published: July 13, 2014


1. Expense Defined
In accounting, expense has a very specific meaning. It is an outflow of cash or other valuable assets from a person or company to another person or company. This outflow of cash is generally one side of a trade for products or services that have equal or better current or future value to the buyer than to the seller. Technically, an expense is an event in which an asset is used up or a liability is incurred. In terms of the accounting equation, expenses reduce owners' equity. The International Accounting Standards Board defines expenses as decreases in economic benefits during the accounting period in the form of outflows or depletions of asset or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants. Expenses encompass losses as well as expenses which arise in the course of ordinary activities of the entity. Framework says that losses represent decreases in economic benefits and are therefore not different in nature from other expense. The FASB distinction between expense and losses does not seem to be very useful. It requires a judgment about whether a transaction is a part of the entity’s ongoing major or central operations. Not having to distinguish between expenses and losses has distinct advantages management will no longer be able to decide that an outflow of assets is a loss and omit it from the determination of operating profit. 1.1. Changes in assets and liabilities

Expenses are related to the value aspect of assets and liabilities. Revenues and expense come about because of events increase in the value of liabilities or decrease in the value of assets. We can say the expenses appears from the changes in asset if there is a transaction that decrease an asset or cause the outflow from economic source. Uses of raw material for making a product we can not say as an expenses as long as the product have not sold yet. There is only changing in assets as service potential. Besides, will reduce the amount of owner's or stockholders' equity. For example an expense might reduce a company's assets such as Cash, Prepaid Expenses, or Inventory, increase the credit balance in a contra-asset account such as Allowance for Doubtful Accounts or Accumulated Depreciation, increase the balance in the liability account Accounts Payable, or increase the amount of accrued expenses payable such as Wages Payable, Interest Payable. In addition to the change in the assets or liabilities, an expense will reduce the credit balance in the Owner Capital account of a sole proprietorship, or will reduce the credit balance in the Retained Earnings account of a corporation. 1.2 Expenses and ‘Cost’

Expense represent a value change. The value change refers to the sacrifice which the firm must make in acquiring the service. If there is no cost to the firm, then there is no expense. The difference between cost and expense is a considerable one, and yet the terms are frequently intermingled even in the published works of accounting authors. This makes the difference extremely difficult to understand for those people training to be accountants, and who are therefore uncertain about the nature of the terms. A cost might be an expense or it might be an asset. An expense is a cost that has expired or was necessary in order to earn revenues. Let’s use this illustrate, your company is in the catering business and will cater its biggest event this evening. In the morning your company purchased about 125% of the paper goods that you believe will be used at the event. (You purchased the additional 25% for future events and also to ensure you don't run out of these items at this evening's event.) The paper goods that were purchased had a cost of $500, and only $400 of the paper items were used at today's event. The...

References: http://www.accountingcoach.com/blog/expense-affect-balance-sheet
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