In the world of business, you have to spend money to make money. All businesses have expenses. No matter what type of business you own and operate, you’ll have to buy various products or services. Known as expenses, they are essential to your business’s operations. There are different types of expenses, however. In this post, you’ll discover the four primary types of expenses.
Fixed expenses are those that stay the same. Your business may incur them on monthly basis. From month to month, though, fixed expenses will remain the same. Common examples of fixed expenses include insurance, interest on loans and certain utilities. An expense is considered “fixed” if it doesn’t change.
Variable expenses, on the other hand, are those that do change. Variable expenses are intrinsically associated with production levels. The more products your business produces — or sells for that matter — the higher its variable expenses will be. You may have to pay for additional labor, raw materials, packaging materials, etc., all of which are variable expenses. Variable expenses are distinguished from fixed expenses because they fluctuate. Fixed expenses remain the same, whereas variable expenses change according to your business’s production levels.
There are also accrued expenses. Accrued expenses can be either fixed or variable. The term “accrued” simply refers to any expense that’s recorded in your business’s accounting books before your business pays it. They are part of the accrual accounting method. With the accrual accounting method, you’ll record expenses after receiving an invoice or bill. Accrued expenses are those that are recorded before your business pays them. Your business may receive an invoice, in which case you can record it as an accrued expense in your business’s books.
Finally, operational expenses are those that play a direct role in your business’s operations. All businesses have operational expenses. Operational expenses consist of products and services that businesses need to perform their operations. Like with accrued expenses, they can be either fixed or variable.
There are four primary types of business-related expenses, including fixed, variable, accrued and operational. Fixed expenses are characterized by their persistent and static pricing. Variable expenses are characterized by their ability to change or fluctuate. Accrued expenses are characterized by the use of the accrual accounting method. Operational expenses are those that are essential to your business’s operations.
Have anything else that you’d like to add? Let us know in the comments section below!