Key Concepts
Expenses are costs incurred in the operation of a business to earn income in the same accounting period.
There are two types of expenses:
| Type | Description | Examples |
|---|---|---|
| Cost of sales | The total cost price of goods that have been sold | Cost of inventory sold to customers |
| Other expenses | Other costs incurred during the operation of a business to earn income | Salaries expense, Utilities expense, Insurance expense, Rent expense, Advertising expense |
How to Remember
Cost of sales is about what you sold. Other expenses are about running the business.
Common Mistakes
1
Treating the cost of unsold inventory as cost of sales. Cost of sales is only recognised when inventory is sold — unsold inventory remains an asset.
2
Including drawings or asset purchases as expenses. Drawings reduce equity but are not an expense. Purchasing equipment is an asset, not an expense.
Check Your Understanding
Classify each item — Cost of sales or Other Expense: (a) cost price of goods sold to a customer; (b) salaries paid to staff.
Reveal answerHide answer
(a) Cost of sales; (b) Other Expense (Salaries expense).
True or false — the cost of inventory that has not yet been sold is classified as cost of sales.
Reveal answerHide answer
False. Unsold inventory remains an asset. Only the cost of goods sold is recognised as cost of sales.
Which expense is deducted from net sales revenue to give gross profit?
Reveal answerHide answer
Cost of sales.