Does an Expense Appear on the Balance Sheet?
No, an expense does not appear directly on the balance sheet.
Expenses are recorded on the income statement, not the balance sheet. The income statement shows a company’s revenues and expenses over a specific period of time, such as a quarter or a year, and calculates the company’s net income (or net loss) by subtracting expenses from revenues.
However, while expenses themselves do not appear on the balance sheet, they can indirectly affect the balance sheet in a few ways:
- Reduction in assets: If an expense involved the use of an asset or cash, the value of that asset on the balance sheet would decrease. For instance, if a company spends cash to pay salaries, the “Cash and Cash Equivalents” line item on the balance sheet would decrease.
- Increase in Liabilities: If an expense has been incurred but not yet paid, it would increase a company’s liabilities in the form of accounts payable or accrued expenses.
- Reduction in Equity: Net income, which is revenues minus expenses, is added to retained earnings (part of shareholders’ equity) at the end of the period. If expenses increase, net income will decrease (assuming revenues stay constant), which in turn reduces the increase in retained earnings and therefore shareholders’ equity.
So, while expenses do not appear directly on the balance sheet, they are part of the broader financial picture and have effects that can be seen on the balance sheet.
Let’s say you’re running a company, and you spend $10,000 on office supplies. This transaction affects your financial statements as follows:
- Income Statement: Your office supplies expense of $10,000 is recorded on your income statement for the period. This reduces your net income (or increases your net loss) for that period.
- Balance Sheet – Assets: If you paid for the office supplies with cash, your cash balance decreases by $10,000. This reduction is reflected in the “Cash and Cash Equivalents” line item on your balance sheet.
- Balance Sheet – Liabilities: If you haven’t paid for the office supplies yet, you would record a $10,000 increase in accounts payable, a liability on your balance sheet.
- Balance Sheet – Equity: Because your net income decreases by $10,000 due to the office supplies expense (assuming no other changes), your retained earnings on the balance sheet would also decrease by $10,000 when you close out your income statement at the end of the period.
So, while the $10,000 office supplies expense does not appear directly on your balance sheet, it affects the balance sheet through its impact on your assets (cash), liabilities (accounts payable, if you haven’t paid yet), and equity (retained earnings).