/Costs
Expenses, sometimes referred to as Costs, are outflows of money associated with running a business. When expenses are incurred, they typically lower profits or reduce the amount of money available to the business. Financial managers are responsible for allocating and managing expenses, ensuring they are accurately accounted for each period and do not become unmanageable.
Definition
Expenses are a type of financial outflows that occur when a business buys something of value to operate. This includes items such as raw materials, wages, utilities, taxes, rents, and other costs associated with running the business. A company’s expenses affect the overall profitability and the amount of money available to finance activities. As such, expenses are an essential component of financial management.
Overview
In a business setting, expenses are typically reported on the income statement and involve the payment of cash or the consumption of an item that has a monetary value. Expenses can also be referred to as costs, and are classified into two distinct categories: operating and non-operating. Operating expenses are incurred in the day-to-day operations of the company, such as production costs, sales costs, salaries, and rent. Non-operating expenses include items such as interest expenses, dividends paid to shareholders, and taxes.
When operating a business, expenses must be managed with care by the financial manager. If not properly monitored, expenses can quickly become unmanageable and negatively affect profitability and the overall financial health of the business. It is important to ensure that the expenditures are aligned with the economic structure and goals of the organization. To prevent and contain costs from escalating, the financial manager must periodically perform detailed analysis and comparison to budgeted amounts, as well as provide oversight and control for all forms of spending.
Key Features
The key features of expenses include:
• Expenses are financial outflows, meaning they reduce the amount of money available to the business or lower profits.
• Expenses can either be operating or non-operating costs.
• Expenses must be managed and accounted for by a financial manager in order to ensure they remain under control.
• Periodic analysis and comparison with budgeted amounts must be conducted to prevent and contain costs.
Example
let’s consider a restaurant as an example. The restaurant’s operating expenses would include the cost of food, wages, utilities, rent, and taxes. Non-operating expenses in this case might include interest on a loan, or a dividend paid to owners of the business. The restaurant’s financial manager must track and manage these expenses carefully to ensure they remain within budget and do not become unmanageable.
Conclusion
Expenses, also known as costs, are financial outflows associated with running a business. To ensure they remain under control, expenses must be carefully managed by a financial manager. This typically involves periodic analysis and comparison to budgeted amounts, as well as oversight and control for all forms of spending. Operating expenses are incurred on a regular basis, while non-operating expenses occur less often, such as when a dividend is paid to shareholders. The overall goal of managing expenses is to ensure the company’s economic structure and goals are achieved without overspending.
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