What does the term ‘expense’ refer to in an accounting context?

In accounting, the term ‘expense’ specifically refers to a decrease in equity that results from the costs of goods or services consumed in the process of generating revenue. Expenses are recognized on the income statement and are essential for understanding the financial performance of a business. They represent the outflows of resources that a company incurs as it conducts its operations, leading to a reduction in net income and, consequently, equity.

When a business incurs expenses, whether it's cost of goods sold, salaries, rent, or utilities, these costs are subtracted from total revenues to arrive at net income. Thus, understanding how expenses impact equity is crucial for analyzing the financial health of an organization. This concept is vital for management, investors, and stakeholders who assess the profitability and operational efficiency of the business.