There are three main documents used by most business to determine the performance of the company. A cash flow statement details the anticipated or actual transfers of cash for the business. A balance sheet shows a company's assets on a specific date in terms of liabilities plus owner's equity. An income statement is a summary of a company's profitability over a certain period of time. This profitability includes a listing of the company's expenses.
An expense is the cost of doing business for a company. This cost can take the form of an "Operating Expense," such as wages and salary paid to employees or "Cost of Goods," which are costs related to the sale of products in the company's inventory. Expense also includes the amounts deducted from earnings, such as bad debts. Expenses are listed on a company's income statement, which itemizes revenue and expenses that have contributed to a company's current level of profitability, or the lack thereof. It covers a monthly, quarterly or annual time frame.
On an income statement, income is shown as revenue minus expenses. That is the basic accounting principle underlying the purpose of the document. As a cost, an expense is subtracted from a company's earnings and thus reduces the company's taxable income, which is why the statement is also sometimes referred to as an earnings statement. Because the statement itemizes how profitable the company is, the income statement is also referred to as a profit and loss statement as well.
An income statement shows costs associated with a business but not all costs are expenses. An expense refers to a cost that has been used up, given up or paid in order to get something. Payment for the acquisition of something of value that the company plans to keep, or hold onto, is a cost but it is also an asset and therefore is not considered an expense. An example is a piece of land that the company buys in order to locate a building.
Depreciation can be an expense for a company as well. If a company purchases an asset for use by the company, such as a delivery truck for a delivery business or a stove for a bakery, That item is initially listed on the income statement as an asset and not an expense. As the item is "used up," the use, or depreciation, of that item then appears on the income statement as an expense even though the item itself is an asset.