Discretionary, Cyclical, and Regular Business and Personal Expenses
Expense refers to the cost of acquiring an asset or money paid for different products and services. Businesses usually pay to suppliers, contractors, employees, and other parties and the aim is to earn revenues. This is the cost of doing business.
Types of Costs
Expenses can be in the form of salaries, wages, payments to suppliers, and other cash payments. Depreciation and amortization form a separate category. Depreciation refers to the loss or decrease in value of a tangible asset for accounting purposes. Different methods of depreciation are used, including group, units of time, units of production, annuity, and straight line depreciation. Amortization is the process of deducting capital expenses for accounting purposes and within a certain period. Money taken out of the company’s earnings is also considered costs. One example is uncollectable revenues or bad debts. Operating costs are recorded as deductions in the profit and loss statement before income tax is assessed. All expenses are regarded as costs. However, acquisition and other costs are not recorded as such.
The Income Statement
The income statement includes non-operating and operating costs. Examples of the former include federal income, excise, and franchise tax, interest on loans and credit cards and loss on the sale of assets. Other examples are fines and penalties and donations. The income statement also includes operating costs such as property taxes and collections. Taxes are levied on real and personal property such as commercial and residential buildings, agricultural and industrial properties, etc. Amortization applies to organizational costs, goodwill, leasehold improvements, and others. Assets such as equipment, fixtures and furniture, and vehicles are depreciated. Other assets, including machinery, plants, and office equipment are also depreciated. The income statement also includes collections and credit in the form of background checks and bad debts.
Businesses also pay for advertising, including magazine, newspaper, magazine, radio, and TV ads. Consulting, tax preparation, accounting, audit, and legal fees are also considered costs, along with franchise fees and royalties. The income statement includes other items such as garbage collection, water, gas, and electricity, as well as other utilities. Travel is also recorded as expense, including meals, airfare, accommodation, etc. Subscriptions, association memberships, finance charges, and permits and licenses are also on the income statement.
Insurance and Leasing
Many businesses pay insurance premiums toward different policies such as business owner’s policy, general liability, directors and officers insurance, worker’s compensation, and others. They also pay leasing expenses for vehicles, equipment and machinery, plants, and land. Businesses sign industrial space, retail, commercial office, and other leases. Commercial retail properties such as strip malls, malls, and other premises are in this category, along with industrial and business parks.
Rent and Supplies
Many companies have rent costs for vehicles, machinery and equipment, and buildings. They pay for office, cleaning, maintenance, and operating supplies, raw materials, and others. Payroll related costs form another category. Examples include state and federal unemployment, salaries, employer Medicare, and others.
Households allocate funds toward different expenses, including utility bills, rent, mortgage payments, personal loans, credit cards, and others. They can be broadly categorized as monthly (regular), cyclical, and unexpected. Examples of the latter are medical bills and home and vehicle repairs. The category of cyclical expenses includes property tax, license renewals, subscription, and others. There are also weekly and monthly costs such as internet and cable, child support, gas, daycare, and groceries. Customers also buy magazines and books, clothing, and other items. They make impulse buys and pay membership fees. Some expenses are cyclical meaning that there is a set pattern. Bills come on a quarterly or annual basis. Trash bills are one example. Others are paid on a monthly basis, for example, personal care items and car payments. Transportation and meals are paid weekly or daily. Vacations and travel, dining out, and entertainment are in the miscellaneous category.
Cash Inflows and Outflows, an Indicator of Solvency
Cash flow is the movement of capital due to investment, normal business operations, or financing. Inflows are money received by a company or organization as a result of its financial activities, investments, sales, and income. Outflows refer to the opposite – money paid to suppliers, banks, and...
Accounts Receivable as an Indicator of Income
Accounts receivable refers to money owed by companies and individual customers to third parties in exchange for services or goods that are ordered, delivered, and used but not paid. Clients have the legal obligation to pay for the services used. This is why accounts receivable are treated as a...