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Glossary

Expense

An expense is a cost a business incurs to generate revenue or run its operations, recorded on the income statement in the period it is used up.

What Is an Expense?

An expense is a cost that a business uses up in order to earn revenue during a period. Expenses appear on the income statement and are subtracted from revenue to arrive at profit. Common examples include employee wages, rent, utilities, insurance, raw materials, marketing, and interest expense on borrowed money.

In accounting, an expense is generally recognized when it is incurred, not necessarily when cash changes hands. This reflects accrual accounting, which tries to match costs to the revenues they help produce, a principle often called the matching principle.

Expenses Versus Assets

Not every outlay becomes an expense right away. When a company buys equipment or a building that will last for years, the cost is usually recorded as an asset on the balance sheet. Its cost is then spread across its useful life through depreciation, with a portion recognized as an expense each year. Spending that creates a lasting asset is often called a capital expenditure, while routine spending that keeps daily operations running is an operating expense.

The distinction matters to investors because it affects reported profit in a given year. A company that capitalizes more spending will usually report higher near-term earnings than one that expenses the same spending immediately, though the difference reverses over time as depreciation accumulates.

Why Expenses Matter to Investors

Expenses are a key part of the story behind a company's profit margin. Comparing expenses to revenue over several periods can show whether a business is controlling its costs, facing rising input prices, or becoming more efficient. Investors also look at how expenses are categorized, since large or unusual items may be one-time charges that distort the picture.

Expenses are not always bad. Spending on research or marketing may lead to future growth. The question is usually whether the spending produces enough return. Individual investors can read the expense lines in a company's financial statements to better understand what drives its results.

Updated October 30, 2026. For general education only; not financial, tax or legal advice.

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Related Terms

Income Statement

An income statement is a financial report that summarizes a company's revenues, expenses, and resulting profit or loss over a specific period, such as a quarter or year.

Interest Expense

Interest expense is the cost a business or individual pays for borrowed money, such as loan or bond interest, recorded over time as a cost on the income statement.

Accrual Accounting

Accrual accounting is a method of recording financial transactions when they are earned or incurred, regardless of when the related cash is actually received or paid.

Asset

An asset is anything of economic value that an individual, company, or organization owns or controls, with the expectation that it will provide future benefit or be convertible to cash.

Depreciation

Depreciation is the accounting method of spreading the cost of a tangible, long-lived asset over the years it is expected to be used, recording a portion as an expense each year.

Capital Expenditure (CapEx)

Capital expenditure is money a company spends to buy, build, upgrade or maintain long-lived physical assets such as buildings, equipment and machinery, rather than for day-to-day operations.

Profit Margin

Profit margin is a percentage showing how much of a company's revenue remains as profit after certain costs are subtracted, indicating how efficiently the business turns sales into earnings.

Operating Expense (OpEx)

An operating expense is a cost a business incurs through its normal day-to-day activities to keep running, such as rent, salaries, utilities, and marketing, but not the direct cost of making goods.