Expense

From Wikicpa

In accounting, an expense represents an event in which an asset is used up or a liability is incurred. In terms of the accounting equation (see below), expenses reduce owners' equity.

The official definition of expense used by International Accounting Standards Board is (quotation from IFRS Framework):

Expenses are decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants. [F.70]

One specific use of the term in accounting is whether a particular expenditure is classified as an expense, which is reported immediately to the in the business's income statement; or whether it is classified as a capital expenditure or an expenditure subject to depreciation, which is not. These latter types of expenditures are reported as expenses eventually, but not immediately, by businesses that use accrual-basis accounting, meaning all large businesses.

The accounting equation

The equation is as follows:

It shows how assets were financed: either by borrowing money from someone else (liability) or by paying your own money (shareholder's equity). For example, a student buys a computer for $945. This student borrowed $500 from his best friend and saved another $445 from his part-time job. Now his assets are worth $945, liabilities are $500, and equity $445.