What is classified as an expense in accounting?

In accounting, an expense is defined as the costs incurred in the operation of a business to generate revenue. This includes all expenditures that are necessary for the business to function and fulfill its revenue-generating activities. Expenses can encompass a wide variety of costs, such as wages, utilities, rent, materials, and other operational costs that are essential for running the business effectively.

When businesses incur expenses, they recognize these costs on their income statement, which is crucial for understanding the profitability of the business. By evaluating expenses against revenue, companies can assess their financial health and make informed decisions for future operations.

Other options refer to concepts that do not fit the definition of expenses. Investments made by the owner refer to capital contributions and are recorded as equity, while funds reserved for future projects suggest a planning or budgeting approach rather than an immediate cost incurred for business operations. Revenue collected from customers, on the other hand, represents income rather than an expense, as it reflects the earnings generated from sales activities.