Day 4

Defintion of expenses

• any money spend to get something

• e.g mortgages, utility bills, and groceries

Business often use expense reports to compile and track expenses, which are then formally reported by accountant on financial statements, like the income statement

• when an expense is reported depends on the type of accounting the business uses

  • the accrual basis or the cash basis of accounting

accual basis of accounting

• expense recorded when the transaction occurs, even if money has yet to be exchanged

  • e.g business trip and prepaid hotel is recorded as a business expense even if money is not charged to the account until check-out

Cash basis accounting

• records expenses once money had been exchanges

  • e.g if a business books a hotel reservation, it wouldn’t mark a transaction expense until the money is withdrawn from its accounts by the hotel

The planning process

Expenses and costs

There are different types of expenses

• recurring

• one time

• fixed

• variable

Different types of costs

• opportunity cost

  • the sacrifice of exclusive choice

Opportunity costs

choosing one thing versus another, you effectively incur costs which can be expressed as the value of the missed opportunity

Fixed expenses

Costs that remain the same for the most part

• rent or mortgage payments

• car payments

• insurance premiums

• property/school taxes

• tuition

• student loan payments

Variable expense

• those that change in cost

  • groceries

  • gas

  • eating out

  • entertainment

Budgeting for fixed vs variable costs

• large part of budgeting is determining the difference between wants and needs

How to budget for fixed expenses

• prioritize budgeting for fixed expenses first

How to budget for variable expenses

• assess your typical spending in these categories for a few months before making your budget

• you can take an average of your monthly spending for each variable expenses and include that amount in your budet

• as time goes on you can reasses to ensure you’re budgeting the proper amount

Saving on fixed costs

• e.g search for a less expensive phone or internet plan

• drop subscription services you no longer use or can live without

Saving on variable costs

• ask yourself before buying if it is a want or a need