• What is the expense?
• Expense types
• Difference between expense and cost
• Difference between expense and loss

We explain what an expense is and the characteristics of each type. Also, the differences with costs and losses.

Expenses made by companies are not always recovered.

What is the expense?

Expense is the use of a certain money budgeted, either by an individual, a business, a organization or a Condition, to obtain in exchange a good or a service determined. In that sense, the term is synonymous with egress, that is, the opposite of a entry.

However, in the world of economy and the finance, a distinction is usually made between the different forms of spending, as well as between that carried out by an individual, never recovering it, and that carried out by companies, which in many cases can be transformed a posteriori into new income, that is, recuperate. In the latter case, we normally speak of a investment.

Either way, an expense is simply a voluntary outflow of money. We spend when we buy things, but also when we pay for services, which in the world of accounting it is understood as a decrease in our assets. But, as we will see later, we must not confuse it neither with losses, nor with costs, different notions in the world of economics.

Expense types

In accounting, there are three types of expenses:

• Fixed costs. When it comes to regular and necessary quantities, which do not vary much, and which have a certain periodicity: monthly, such as the bill of the electricity, or annual, such as taxes of a car.
• Flexible expenses. When they are regular and necessary expenses, such as fixed ones, but in which we have greater discretion regarding how much to spend, since the payment ceiling can be assigned by us. This is the case, for example, of what we spend shopping for groceries, since we will pay as much as we decide to consume, although the cost of each food is out of our control.
• Discretionary expenses. When we have full control of the amount to spend, although it is not necessarily necessary or regular items, but quite the opposite: it is about occasional expenses that depend on our desire, such as going to the movies, buying new clothes or even save money. We decide how much to spend and in what way, and whether to do it or not.

Difference between expense and cost

Costs are expenses that are part of a production chain. That is, an expense is an outflow of money that is not recovered, while a cost is an outflow of money destined to obtain a good or a service necessary to produce other goods or services.

What is produced, later, will generate income on its own, covering the amount spent on its production (that is: its production costs) and, perhaps, leaving a gain or a surplus.

So the expenses of a company in raw material, workforce or productive inputs, are not usually counted as "expenses", but as "costs", since their return is expected. On the other hand, money used by said company for the festival of Christmas it will be properly an expense, since it will not return (or at least its return will not be in money, but in happiness for the employees).

Difference between expense and loss

Similarly, expenses and losses are differentiated, since the latter are involuntary outflows of money. They occur at the end of a production chain, when the money obtained from the sale of the goods or services produced is not enough to cover their production costs.

For example, when an organization invests money in producing a good whose sale brings less money than invested, it is said that the company “lost” money, that is, there were losses.

Expenses, on the other hand, as we have said, are outflows of money that does not return, but which is used to obtain services and goods in exchange. Obviously, when a business is making losses, the first thing that is cut is its expenses, especially discretionary expenses.