Business Expenses

Updated on May 1, 2024
Article byWallstreetmojo Team
Edited byPallabi Banerjee
Reviewed byDheeraj Vaidya, CFA, FRM

Business Expenses Definition

Business expenses are incurred to run, operate, and maintain a business smoothly. Examples of business expenses include travel & conveyance, salaries, rent, entertainment, telephone & internet expenses, etc. The only key requirement is that it should be incurred for the business, and no personal costs are included.

Business-Expenses

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They may be fixed in nature, which do not change, like rent or lease. Some of them are variable, too, like that of marketing or advertising. Companies use capital expenses for many years. They should be properly recorded for reporting, tax, and financial management purposes.

Business Expenses Explained

Business expenses are the ones that are incurred during the day to day operations of any entity. The might be fixed or variable in nature and is an important part in management reporting.

The company needs to manage these expenses so that they may not take away the profits or increase the prices or manufacturing cost of the goods and services. They should always be kept under control through proper monitoring and strategic implementation of ideas and technology.

They also have some positive signs in the business. With them, the company can expand and grow or compete with its peers in the market. Therefore it is necessary to understand them properly.

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Types

Some examples are very much standard in the business industry. So let us look at the list of business expenses which is as follows:

#1 – Salaries

Salaries of employees, workers, and staff are the most common and important costs, which can be found in every business’s profit and loss accountProfit And Loss AccountThe Profit & Loss account, also known as the Income statement, is a financial statement that summarizes an organization's revenue and costs incurred during the financial period and is indicative of the company's financial performance by showing whether the company made a profit or incurred losses during that period.read more. It is the amount paid to the employees for their services to the business every month.

#2 – Telephone & Internet Expenses

In today’s time, no business can survive without a communication channel, and the highest cost to run any business is the expenses of telephone and internet service. It is another basic and most common cost available in every business’s profit & loss. To increase revenue, every business needs to expand, grow, communicate with its customers and vendors, and look after the policies of its competitors. All of this is possible only when good communication channels are available in the business.

#3 – Travelling & Conveyance

Traveling & conveyance is another common cost generally found in every profit and loss account. It is the costs incurred by the traveling of the employees, directors, or anyone for the business meetings, growth, and communication from office premises to the place where such an event has to take place. Conveyance is the local traveling to a meeting or client, whereas traveling can be considered out of station events.

#4 – Rent

Rent is a cost incurredA Cost IncurredIncurred Cost refers to an expense that a Company needs to pay in exchange for the usage of a service, product, or asset. This might include direct, indirect, production, operating, & distribution charges incurred for business operations. read more by those businesses who take the business premises on hire and run their business from a rented location. It is one of the high costs other than salaries, which is of high value and a fixed expense.

#5 – Printing & Stationery

Printing and stationery is also a regular cost incurred by the business on the notebooks, registers, A4 sheets of papers, pens, calculators, and other necessary items used in the business in day to day working of the business.

Therefore the ones mentioned above are a list of business expenses.

Deductions

Deductible Expenses are those costs that are allowed as deductions in a business’s profit and loss account. The tax deductible business expenses are somehow considered expenses related to business.

Business expenses incurred by any person from the business, be it an employee, director, owner, or staff, would be allowed a deduction from the income tax calculation provided such costs are incurred purely for the business. First, the expenses need to be verified by the respective managers. Then they should forward the reimbursement of business expenses to the accounts department.

BasedBasedThe accounting department looks after preparing financial statements, maintaining a general ledger, paying bills, preparing customer bills, payroll, and more. In other words, they are responsible for managing the overall economic front of the business.read more on the Invoices/bills received and after proper approval of the managers regarding the expenses being incurred for business, the accounting department would claim the deduction in the profit and loss statement of its business.

Other Types of Deductible Expenses

There are many types of costs incurred by a business for smooth & successful running. Some are allowed as The tax deductible business expenses, and others are Non-Deductible Expenses, such as Donations.

Other types of deductible expenses are which are not related are:

  1. Entertainment Expenses: These incur for the entertainment purpose of the employees and staff working in the entity. The company incurs such expenses to keep the employees happy and provide a better work environment. It is allowed as a deduction even though they are not related to a business directly.
  2. Staff Welfare Expenses: These are also the costs for the benefit of the employees working in the entity. These include tea, coffee, snacks, and other celebration expenses for the employees.
  3. Depreciation: DepreciationDepreciationDepreciation is a systematic allocation method used to account for the costs of any physical or tangible asset throughout its useful life. Its value indicates how much of an asset’s worth has been utilized. Depreciation enables companies to generate revenue from their assets while only charging a fraction of the cost of the asset in use each year. read more is an intangible business expenseExpenseAn expense is a cost incurred in completing any transaction by an organization, leading to either revenue generation creation of the asset, change in liability, or raising capital.read more not incurred in cash/bank transactions. These expenses are for the use of machinery during the year, which is generally called normal wear and tear of the machinery over time.

Example

Let us take an example of ABC Ltd, which is a retails store, selling clothes. It has taken a huge space in one of the prominent shopping malls in the city and pays a heavy rent. The ambience and the decoration inside the store is great and of very good quality. In order to attract customers ABC Ltd has put up banners in prominent areas of the city and also spends money in advertising in magazines and newpapers, as well as online. It has an many as thirty staffs to cater to the customers daily.

In this case, we see that the fixed expenses incurred are rent, salary of staffs, the fixed assets like the cupboards and racks for hanging clothes, the other furnitures for office use, etc. The variable expenses include electricity bills, advertising expenses, etc.

Tracking

The answer to the above question is straightforward. The person incurring such costs had to provide the Invoices/bills for the business or business expenses sheet. Those invoices/bills will be verified by the designated person in the accounts department and must be approved by the respective managers. It can also be tracked from the bank statements of the business or through the credit card statement of the company if the expenses are paid from these banking sources.

Any expense paid through an electronic medium such as net banking, internet banking, credit card, and debit card can be tracked easily. This is because they have a transaction id and reference id attached to every payment, through which one can conclude whether it is a business expense or not.

Importance

Every business incurs some expenses during its operation. For running any business, various types of costs must be incurred to operate the business smoothly and successfully. Among them there are a lot of costs that are recurring in nature. Rent and salaries are a significant amount of recurring expenses. Some of the expenses can be one-time payments in the year, such as Annual Subscription, Annual Membership, and Depreciation. The only need for it is to run any business because none of the business can run without incurring expenses. Every business needs different kinds of business expenses sheet to run it.

  • Tax payment – Tax payment is essential for every business. Therefore it is necessary to keep track of the expenses that are incurred so that tax reporting becomes easy. There are many expenses that are tax deductible and they should be properly noted to get tax refund. Otherwise, that amount is a loss for the company.
  • Budgeting – This is very important step in any entity. If budgeting is not done properly then there will be unnecessary expenditure in various areas whereas the activities that really require money will not get it. Therefore, budgeting helps to plan out the expense systematically and for this the business should keep track of their daily expense through business expenses report.
  • Growth and expansion – Unless the organization tracks the expenses and tries to keep them under control, it will not be possible to achieve growth or invest fund in expansion because there might be useless expenses that may erode away the profits and has to be immediately cut down. If fund is not available, then the business will not be able to invest in growth and expansion.
  • Finance management – efficient management of money in business not only helps in reducing wastage but also channelizing the money into more productive and useful causes. Therefore, expenses should be tracked and reduced so that cash flow and profits increase.

The above points give a clear idea about the importance of managing business expenses reports.

Business Expense Vs Personal Expense

The two types of expenses are completely different from each other even though they both are expenses. Let us try to find out some basic differences between them as given below:

  • The former is related to business operations while the latter is related to the personal life of any individuals.
  • Many expenses incurred in business are tax deductible while in case of personal expenses, that does not happen.
  • Business incurs expenses like rent, travelling, stationery, advertising, etc while personal expenses can be clothing, entertainment, groceries, etc.
  • The former is done so that the business can grow and earn revenue, whereas the latter is done to improve personal living standard and meet the needs for day to day living.
  • Money from business should not be used to meet personal expenses because it may result in penalty and business may face cash crunch. Both should be treated and tracked separately.

Therefore, it is advisible to take the help of financial consultants and experts to keep account of both types of expenses instead of only relying on one’s own judgement.

Recommended Articles

This has been a guide to Business Expenses and its definition. We explain tracking & deduction along with example, types & differences with personal income. You may also have a look at the following articles –

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  1. Angela Childs says

    Interested in learning more

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