Expenses are the cost of doing business for an entity. Expenses can in the form of money spent on items, services, benefits or it can be the costs associated with business that do not necessarily involve spending cash (for example the cost of bad debts creates a Bad Debts Expense account). We review individual expenses, such as Bad Debts Expense, in later articles (click here for Bad Debts Expense). This article focuses on what constitutes an Expense and how it is presented in the financial statements.
When accounting for entity finances, the underlying assumptions state that we should assume we are using the accrual-basis of accounting. As such, expenses should be recognized when the they are incurred, and not necessarily when the services/goods are paid for. This can result in the creation of “Prepaid Expense” assets - when an entity has paid for a service that has not yet been rendered. Our "Expenses: Common Journal Entries" article presents some common expense transactions and how to record their journal entries.
Both IFRS and ASPE have similar definitions for the board category of Expense. However, there are differences in accounting for specific expense items. These will also be reviewed in later articles dedicated to individual expense items.
Examples of expenses, and how they are presented in the Financial Statements: both IFRS and ASPE, can be found, below.
Excerpt from the Statement of Profit and Loss/Income Statement:
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