An expense is a cost associated with the generation of revenue.
Some expenses, such as depreciation, represent the reduction in the value of an asset. Such expenses are called noncash expenses because they have no immediate cash impact. Other expenses represent a current payment or the recognition of a future payment.
If the company uses cash-basis accounting, the company will record most expenses at the time of payment. If the company uses accrual-basis accounting, the company will record expenses when the expenses are incurred.
As an example, suppose XYZ Consulting, Inc. uses a document shredding service, ABC Shredding LLC. ABC comes to XYZ’s office on June 15th to provide service. Several days later, ABC sends XYZ an invoice for $200 with payment due in 30 days. If XYZ uses accrual accounting, XYZ’s bookkeeper initially records the transaction by debiting office expense and crediting accounts payable. The date of this entry is June 15th, the date on which service was provided. In the following month, the bookkeeper issues a check to XYZ and records the payment by debiting accounts payable and crediting cash.
If XYZ uses cash accounting, the bookkeeper makes no accounting entry in June. Rather, in mid-July, the bookkeeper issues a check and records the transaction by debiting office expense and crediting cash.
With accrual accounting, the transaction is on XYZ’s June income statement with a payable on the June balance sheet. With cash accounting, the transaction is on XYZ’s July income statement.
With accrual accounting, expenses are recognized using the matching principle, which states that expenses should be recognized in the same period as the corresponding revenue.
