What is an expense?
Published
Definition
An expense is a cost whose benefit was consumed in the period to run the business: rent, salaries, marketing, utilities. It reduces profit on the income statement, with the standard entry: expense (+ input VAT where applicable) debit, bank or payables credit.
Four things that are not expenses - and get booked as one
| Confused with expense | What it really is | Effect of the confusion |
|---|---|---|
| A fixed asset purchase (the 5,750 equipment) | An asset consumed via depreciation over its life | The period's profit collapses falsely; later periods carry no cost |
| Cost of goods sold | Its own classification above operating expenses | Gross profit vanishes from your statements - see its page |
| Owner's drawings (Al-Waha's 18,000) | An equity reduction | Reported margin 2.0% instead of 5.9% - see the balance sheet |
| Paying suppliers | Closing a payable for an already-recorded cost | The expense counted twice |
The asset-or-expense rule
Benefit beyond the period (a year+) + a material amount ← an asset, depreciatedBenefit of this period, or a trivial amount ← expense immediately
The capitalisation threshold is a written internal policy (say SAR 500 or 1,000): below it, expense - even if it lasts years. A SAR 400 printer doesn't deserve an asset register line and a depreciation schedule.
Frequently asked questions
Is VAT on purchases an expense?
Deductible: no - an asset offset against outputs. Non-deductible: it enters the cost. See input VAT.
A cost spanning two periods (annual insurance)?
A prepayment, released monthly - that page has the full schedule.