An expense is the cost of resources consumed in running a business and earning its revenue - wages, rent, electricity, insurance and the like. Expenses reduce profit and appear on the income statement below revenue.
What it means
Under the matching principle, an expense is recognised in the period the related benefit is used or the revenue it helped earn arises, not necessarily when it is paid. Salaries earned by staff in March are a March expense even if paid in April. A debit records an expense; a credit reverses it.
Where it fits in
Payroll is one of the largest expenses most businesses carry. The full cost of employment - gross pay plus employer contributions to UIF, SDL and retirement funds - is expensed each pay run, with the unpaid portion sitting as a liability until settled.
Key rules
- An expense is a cost of resources used up in earning revenue.
- Recognised when incurred, matched to the period it relates to.
- Payroll cost is expensed in full, including employer contributions.
- Debits increase expenses; credits decrease them.
