VCE Accounting Unit 3. Video of this presentation can be found on my YouTube channel here https://www.youtube.com/channel/UCf5jyuJoYwie8tWfvjEc0zg.

1. 1.18
EXPENSES

2. Video of this presentation at…
YouTube Channel for VCE Accounting

3. © Michael Allison. Author’s permission required for external use.
1.17 REVENUE
Assets
Liabilities
Owner’s Equity
Revenues
Elements of Accounting
Expenses

4. © Michael Allison. Author’s permission required for external use.
1.18 EXPENSES
Expenses
Definition:
Expenses are:
1. Outflows of economic benefits or reductions in inflows of economic
benefits
2. That will either:
•  Assets
• Liabilities
3. With the ultimate effect of:
•  Owner’s Equity

5. © Michael Allison. Author’s permission required for external use.
Expenses
will…
 Owner’s Equity
by either…
or…
Outflow of economic
benefits
Reduction in inflow of
economic benefits
 Assets  Liabilities
1.18 EXPENSES

6. © Michael Allison. Author’s permission required for external use.
 Example: a small business paid its monthly phone bill for $800
 Example: a small business received a bill for this month’s advertising
for $1,500
Assets Liabilities
Owner’s
Equity= +
 Cash $800
 $800  $800
 Capital $800
Assets Liabilities
Owner’s
Equity= +
 Creditors $1,500
 $1,500  $1,500
 Capital $1,500
1.18 EXPENSES

7. © Michael Allison. Author’s permission required for external use.
336.8
140.2
27.2
10.2
33.2
-
50.0
100.0
150.0
200.0
250.0
300.0
350.0
400.0
Sales and marketing Rent Administration Finance expenses Depreciation
JB Hi-Fi Expenses ($m)
1.18 EXPENSES

8. © Michael Allison. Author’s permission required for external use.
Expenses
 Examples: A firm has these transactions:
 Purchases a computer for $2,000 cash
 Makes a loan repayment for $2,000
 Pays it monthly wages for $2,000
 All of these represent $2,000 going out of the business which
will result in  Assets.
 So why aren’t they all considered as Expenses?
1.18 EXPENSES

9. © Michael Allison. Author’s permission required for external use.
Expenses
 Purchases a computer for $2,000 cash
 Cash
$2,000
 Expense
$2,000
 Computer
$2,000
Net Effect
= 0
Assets Liabilities
Owner’s
Equity= +
Is NOT an Expense because…
• There is an outflow of economic benefits
• Assets  or Liabilities
• Owner’s Equity 
Net effect
= 0
1.18 EXPENSES

10. © Michael Allison. Author’s permission required for external use.
Expenses
 Makes a loan repayment for $2,000
 Cash
$2,000
 Expense
$2,000
 Loan
$2,000
Net Effect
= 0
Assets Liabilities
Owner’s
Equity= +
Is NOT an Expense because…
• There is an outflow of economic benefits
• Assets  or Liabilities
• Owner’s Equity 
1.18 EXPENSES

11. © Michael Allison. Author’s permission required for external use.
Expenses
 Pays it monthly wages for $2,000
 Cash
$2,000
 Expense
$2,000
Is an Expense because…
• There is an outflow of economic benefits
• Assets  or Liabilities
• Owner’s Equity 
Assets Liabilities
Owner’s
Equity= +
1.18 EXPENSES

12. © Michael Allison. Author’s permission required for external use.
 The owner of a small business withdrew $900 as drawings . Is this an
Expense?
 NO – the owner’s drawings are NOT classified as an Expense because:
 While Assets and Owner’s Equity have decreased…
 The firm has not incurred anything itself in its daily operations…
 The owner has just withdrawn their capital.
Assets Liabilities
Owner’s
Equity= +
 Cash $900
 $900 $0  $900
 Capital $900
1.18 EXPENSES

13. © Michael Allison. Author’s permission required for external use.
TASK
In-class Homework
Cambridge Exercise 1.6 -
Expenses X
Cambridge Exercise 1.7 X