When you run a business you’ll have to pay for certain things to provide your goods or services. This is defined as an expense.
Some will be one-off purchases – assets you have to buy to start your business or equipment that needs to be upgraded or replaced during normal operations. Others will be day-to-day purchases – costs your business incurs regularly to bring your product or service to market.
The definition of the word expense is a wide one for tax purposes, and many of these costs can be offset against the business’s income to reduce tax liability. However, HMRC operates strict rules on what is allowed, so recording them using a reliable accounting method is key.
Common business expenses
These are regular costs necessary to pay in order to run your business and deliver services or products. Some will be fixed at the same amount each month, such as rent or insurance, and others will vary according to business needs, such as raw materials. These are recorded in your company’s income statement in the period when they occurred.
Here are some of the most common operating expenses:
- Advertising and marketing
- Software subscriptions
- Accounting fees
- Raw materials
- Bank charges
- Repairs and maintenance
These are one-off costs unrelated to your normal business operations. These
include loan repayments, moving costs, lawsuit settlements and inventory write-offs.
This represents investment in the business, such as when you buy an asset like a building or a piece of equipment. The benefit of this investment will likely be longer than a tax year. Any capital expenditure is recorded as an asset in your company’s balance sheet rather than on the income statement.
The cost of the asset depreciates over its useful life and this depreciation cost is then included on the company income statement and offset against income tax.
How to record expenses
Whether you’re self-employed and completing your own tax return or engaging someone else to do your accounting, you’ll need to record your business income and outgoings. Most businesses will use some type of accounting software or spreadsheet to keep track of their transactions.
Expenditure is recorded on the income statement and subtracted from any revenue, to provide the taxable net income.
There are two ways to account for business income and outgoings. Whichever method you choose, it’s important to keep detailed records to ensure your income tax return is accurate.
Under this accounting method, income and outgoings are recorded when the transaction occurs, instead of when payment is made; for example, if you buy raw materials on account and pay for them at a later date.
In cash accounting, the transaction is recorded only when payment is actually made; for example, when the money leaves your account, rather than when the liability occurs.
Frequently asked questions about expenses
What are considered expenses?
Expenses are wholly and exclusively for business use such as stationery, rent etc. If you purchase something which has a dual business and personal use, you can claim only for the business use.
Is cost the same as expense?
Most people use the two terms interchangeably, but for accounting purposes they have different meanings. Cost refers to the cost of production or operation, while expense refers to fixed monthly expenditure such as rent or utilities.
What is an expense budget?
This will set a limit on the amounts likely to be spent on particular areas in a set period. It provides a long-term overview of areas of expenditure and likely costs, and it helps limit overspending. Having such a budget can help reduce liabilities and maximise income.