Living Expenses: What Are They and How Do I Budget for Them?
This is achieved by boosting revenues while keeping expenses in check. Slashing costs can help companies to make even more money from sales.
Different Types of Expenses
Having a budget ensures you’re prepared and in a good financial place for whatever comes your way. While there are likely other recurring costs in your life, they might not be considered as a living expense. For example, recreational activities and entertainment aren’t living expenses. That means your gym membership and Netflix subscription should be accounted for elsewhere.
You can do this through a budgeting program you used, or by checking your bank or credit card statements,” she says. Fixed expenses are consistent and expected bills you pay each month, such as a mortgage or rent, a cellphone bill and a student loan payment.
But both of these expenses are subtracted from the company’s total sales or revenue figures. A couple of simple examples should help clarify what that means.
Examples of Expenses
Revenue (also referred to as Sales or Income) forms the beginning of a company’s Income Statement and is often considered the “Top Line” of a business. Under the matching principle, expenses are typically recognized in the same period in which related revenues are recognized. For example, if goods are sold in January, then both the revenues and cost of goods sold related to the sale transaction should be recorded in January. Cash accounting is a bookkeeping method in which revenues and expenses are recorded when received and paid, respectively, not when incurred. One of the main goals of company management teams is to maximize profits.
What does expenses mean in accounting?
An expense is the cost of operations that a company incurs to generate revenue. As the popular saying goes, “it costs money to make money.” Businesses are allowed to write off tax-deductible expenses on their income tax returns to lower their taxable income and thus their tax liability.
The portion of salaries and wages that go directly toward producing the products or services you sell are listed at the top of the statement as part of COGS, or cost of goods sold. The portion of wages and salaries that go to other business activities, such as sales and bookkeeping, are listed with your other expenses and are categorized as indirect costs. Operating expenses (OPEX) and cost of goods sold (COGS) are separate sets of expenditures incurred by businesses in running their daily operations. Consequently, their values are recorded as different line items on a company’s income statement.
If your business is healthy and successful, the amounts you spend on salaries, wages and operating expenses add value to your bottom line. Direct labor included in cost of goods sold should go into creating products that you can sell for more than the cost of the materials and payroll that went into them. These sales typically translate into assets that improve your company’s net worth. A company must shrewdly budget for its operating expenses while maintaining its competitive edge. After all, these costs are incurred regardless of sales figures.
Let’s say you’re preparing your income statement for the month of October. If you’re a retailer, you will be recording the cost of goods sold in October, even if you actually paid the cost of these goods during a different accounting period. Likewise, any utilities used in October (electricity, phones, etc.) will be part of October’s income statement, even though you will likely be paying for these services during the following month.
Determining your fixed and variable expenses is paramount to effectively building a budget. But while accounting for necessary costs is a simple and straightforward task, including discretionary expenses in your budget can present a challenge.
You’ll also want to ensure your budget includes any debt repayment, such as for a student loan. Accrual accounting is based on the matching principle that ensures that accurate profits are reflected for every accounting period. The revenue for each period is matched to the expenses incurred in earning that revenue during the same accounting period. For example, sale commission expenses will be recorded in the period that the related sales are reported, regardless of when the commission was actually paid. Revenue is the value of all sales of goods and services recognized by a company in a period.
- Period costs, such as office salaries or selling expenses, are immediately recognized as expenses (and offset against revenues of the accounting period) also when employees are paid in the next period.
An expense in accounting is the money spent, or costs incurred, by a business in their effort to generate revenues. Essentially, accounts expenses represent the cost of doing business; they are the sum of all the activities that result in (hopefully) a profit. For example, if a business owner schedules a carpet cleaner to clean the carpets in the office, a company using cash basis records the expense when it pays the invoice. Under the accrual method, the business accountant would record the carpet cleaning expense when the company receives the service. Expenses are generally recorded on an accrual basis, ensuring that they match up with the revenues reported in accounting periods.
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For example, a donut shop must continue paying rent, utilities, and marketing costs, regardless of the number of French crullers it moves in a given week. This means that on any given income statement, the expenses match up with the revenues reported for that accounting period, and not with the period during which you actually pay for these expenses. Some living expenses are fixed and won’t change often, such as your monthly rent. Other expenses are adjustable, such as food and clothing. That means that your spending and savings might differ from month to month, and that’s okay.
What is an Expense?
However, if expenses are cut too much it could also have a detrimental effect. For example, paying less on advertising reduces costs but also lowers the company’s visibility and ability to reach out to potential customers. It’s easy to record costs and manage your company expenses with Debitoor accounting & invoicing software. Whenever you create an expense, Debitoor will suggest how it should be categorised, making it easier to see how your money is being spent.
And the matching principle instructs that an expense should be reported in the same period in which the corresponding revenue is earned, and is associated with accrual accounting. Conversely, cash basis accounting calls for the recognition of an expense when the cash is paid, regardless of when the expense was actually incurred. Accrued expenses is a liability with an uncertain timing or amount, but where the uncertainty is not significant enough to qualify it as a provision. An example is an obligation to pay for goods or services received from a counterpart, while cash for them is to be paid out in a later accounting period when its amount is deducted from accrued expenses.
DateAccountNotesDebitCreditX/XX/XXXXPrepaid Expense1800Cash1800Each month, adjust the accounts by the amount of the policy you use. Since the policy lasts one year, divide the total cost of $1,800 by 12. The process of recording prepaid expenses only takes place in accrual accounting. If you use cash-basis accounting, you only record transactions when money physically changes hands. Instead, they provide value over time—generally over multiple accounting periods.
Expense
If you use money from your company to pay for a personal expense, you should not include the cost when calculating your annual allowable expenses. DateAccountNotesDebitCreditX/XX/XXXXPrepaid Expense9000Cash9000As each month passes, adjust the accounts by the amount of rent you use. Since the prepayment is for six months, divide the total cost by six ($9,000 / 6). To prevent your variable costs from spiraling, Beverly Miller, a personal finance coach in Pittsburgh, suggests socking money away in case your variable expenses are higher than you predict. “Your emergency fund is there to catch truly unpredictable and necessary expenses,” Miller says.
Car insurance, home insurance and life insurance are also fixed payments, along with your monthly electric and water bills. A digital subscription to a newspaper and monthly cable or streaming services are additional fixed costs.
Period costs, such as office salaries or selling expenses, are immediately recognized as expenses (and offset against revenues of the accounting period) also when employees are paid in the next period. Unpaid period costs are accrued expenses (liabilities) to avoid such costs (as expenses fictitiously incurred) to offset period revenues that would result in a fictitious profit. An example is a commission earned at the moment of sale (or delivery) by a sales representative who is compensated at the end of the following week, in the next accounting period. In accrual accounting, the revenue recognition principle states that revenues should be recorded during the period in which they are earned, regardless of when the transfer of cash occurs.
Most experts suggest having enough in the bank for three to six months of living expenses. In order to identify discretionary costs, first you must take stock of your finances and factor in any predictable costs based on your historical spending patterns. “The goal has to be to turn variable expenses into expected and predictable expenses,” says Ahna Holloran, a personal finance coach with Fika Finance, a money coaching service in Los Angeles.
What are examples of expenses?
An expense in accounting is the money spent or cost incurred in an entity’s efforts to generate revenue. Expenses represent the cost of doing business where doing business is the sum total of the activities directed towards making a profit. Note: Cash payments do not always mean that an expense has occurred.
For example, if you own a retail business, some of your operating expenses could include cost of goods sold, commissions paid to sales staff, and the cost of renting your retail space. These are costs incurred from borrowing or earning income from financial investments. Examples include loan origination fees and interest on money borrowed. The Income Statement is one of a company’s core financial statements that shows their profit and loss over a period of time. When claiming allowable expenses, it is important to distinguish between business costs and personal expenses as you cannot claim private purchases as allowable expenses.