What are business expenses?
Business expenses are costs incurred to earn revenue and keep the business operating. They are deducted from revenue in the income statement to arrive at net income. Many tax systems allow businesses to deduct expenses that are "wholly and exclusively" or "ordinary and necessary" for the business.
Common categories
- Cost of goods sold: materials, stock and direct labour (see cost of goods sold).
- Operating expenses: rent, utilities, salaries, insurance, software subscriptions, marketing, professional fees.
- Travel and meals: usually deductible within limits.
- Depreciation and amortization: the spread cost of long-term assets.
- Interest and bank charges.
- Taxes and licences (but usually not income tax itself or fines).
Capital vs revenue expenses
Revenue expenses are used up within the year and expensed straight away. Capital expenses buy assets that last longer than a year and are spread through depreciation. Getting this split right affects both profit and tax.
Record-keeping tips
- Keep receipts and invoices for every expense, digitally if possible.
- Separate business and personal bank accounts.
- Categorise expenses consistently using a chart of accounts.
- Note the business purpose for travel, meals and entertainment.
Why it matters
Tracking expenses accurately shows your real profit margins, helps you control costs and makes sure you claim every legitimate tax deduction.