What are expenses?
Expenses are the costs a business incurs to generate revenue — recognised on the income statement in the period in which they help produce the related revenue. Under IFRS (the Conceptual Framework and IAS 1) and US GAAP (ASC 220), expenses are recognised using the matching principle: cost follows the revenue it helped earn, not necessarily the period in which cash leaves the bank.
Main categories
- Cost of goods sold (COGS): direct costs of producing or delivering the product — appears above gross profit.
- SG&A (Selling, General and Administrative): sales, marketing, rent, executive payroll, professional fees.
- R&D: research and product-engineering spend, typically expensed as incurred under US GAAP and IFRS for most software businesses.
- Depreciation & amortisation: non-cash expense allocating the cost of long-lived assets across their useful life.
- Interest expense: cost of debt — appears below operating profit.
Expenses vs. related concepts
- Expenses vs. expenditures: expenditures include capital outlays (which become fixed assets); expenses are the portion recognised against revenue in a period.
- Expenses vs. costs: “cost” is broader (everything paid); “expense” is what flows through the income statement.
- Expenses vs. losses: losses are decreases in equity from non-revenue activities (e.g., asset write-downs).
Practical implications for founders
The single biggest expense classification choice for early-stage companies is what goes into COGS vs. SG&A. Pushing customer-support headcount into SG&A inflates gross margin; pulling it into COGS deflates it. Investors will normalise to a fully-loaded COGS in due diligence.
Do: document a written cost-classification policy and apply it consistently across periods.
Don’t: reclassify between COGS and SG&A to manage the gross margin line — auditors and diligence advisors will catch it.