How is an expense defined in accounting?

An expense in accounting is defined as an outflow of resources that results in a decrease in equity over a specific period. This decrease occurs due to the costs incurred in the process of generating revenue, and it represents the consumption of economic benefits. As expenses are recognized, they reduce the profits for the period, which in turn affects the equity reported in the financial statements.

This understanding is crucial in the context of financial accounting because expenses directly impact the income statement, ultimately influencing the net income and retained earnings on the balance sheet. By recognizing expenses, businesses achieve a clearer picture of their financial performance, allowing for better decision-making and financial management.

The focus on the outflow of resources to a business is central to accurately reflecting a company's financial position during a given period, aligning with the matching principle, which states that expenses should be matched with revenues in the period they contribute to earning those revenues.