Purchases and Expenses

Learn It

An expense is the cost of running the business during a period. Rent, utilities, supplies, wages, and repairs are all expenses. They reduce profit because they represent resources the business has used up.

Here is the key idea that trips up many new bookkeepers: money leaving the bank is not automatically an expense. Sometimes cash buys something that will last for years — that is an asset, not an expense. Sometimes cash pays for something months in advance — that is a prepaid expense, not an expense yet. And sometimes an expense is recorded even when no cash has left at all.

The bookkeeper's job is to understand what each purchase means, not just that money moved. As we learned in the Source Documents lesson, every purchase starts with proof — a receipt, a bill, or an invoice from the vendor.

Pay Now vs. Pay Later

Asset vs. Expense

This is the distinction that matters most. An expenseis something used up in the current period. An assetis something that will provide value for more than one period.

Notice that the lawnmower and the insurance are paid in cash, but neither is fully an expense. The lawnmower is an asset that will be depreciated over its life. The insurance is a prepaid asset that becomes expense month by month. Cash moved, but the expense is recognized over time.

Prepaid Expenses

A prepaid expense is when the business pays in advance for something that will be used over time. Insurance, rent paid in advance, and annual software subscriptions are common examples.

When the payment is made, the full amount goes to a prepaid asset account — not to an expense. Each month, a portion moves from the prepaid asset into the actual expense account. This is called amortization of the prepaid.

Owner-Paid Business Expenses

Small business owners often buy things for the business using personal funds — a personal credit card, personal cash, or a personal bank account. These are still business expenses if they are for the business.

The bookkeeper records the expense and increases Owner's Equity (or a reimbursement payable) because the business now owes the owner for the purchase. When the business reimburses the owner, cash goes down and the owner's equity or payable goes down.

The important point: the expense belongs to the business, even though the money came from the owner's pocket. The bookkeeper must recognize it.

Recurring Expenses and Supporting Documentation

Many expenses repeat every month — rent, utilities, software subscriptions, loan payments. These are called recurring expenses. The bookkeeper should still record each one with its own source document: a rent invoice, a utility bill, a subscription receipt.

Every expense needs proof. A receipt, a bill, or a bank statement showing the charge. Without documentation, there is no way to verify the expense was real, was for the business, and was for the right amount. Good bookkeeping means good records — not just good entries.

See It

Here are five purchases from a landscaping business in March. Watch how each one is classified differently depending on what it is and how it was paid.

Five purchases. Five different combinations of account and payment method. The bookkeeper had to understand each one individually. That is the skill — not just entering the amount, but knowing where it belongs and why.

Do It

Now enter the five purchases yourself. For each one, select the correct account, the correct payment method, and type the amount. Think about whether each purchase is an expense or an asset, and how it was paid.

Prove It

Answer each question, then read the explanation. There's no score — this is just to help the ideas stick.

Ready for more than a short exercise?

Short exercises help you understand one skill at a time. QBO Dojo practice clients let you apply bookkeeping skills across realistic business activity inside QuickBooks Online — including real vendor bills, expense categorization, and prepaid tracking.

Key Takeaways