What is the purpose of an expense account?

The purpose of an expense account is to record costs incurred to earn revenue. Expense accounts are used in accounting to track all expenditures that a business incurs during its operations. These can include costs related to selling products, the cost of goods sold, administrative expenses, rent, utilities, and other operational costs. By documenting these expenses, businesses can determine their net income, manage budgets more effectively, and analyze financial performance over time.

Understanding expense accounts is crucial because they directly impact a company's profitability. When expenses are recorded accurately, businesses can assess how well they are controlling costs and how those costs relate to their revenue generation. This tracking is essential for creating financial statements, such as the income statement, where revenues and expenses are summarized to determine profit or loss.

In contrast, tracking revenue involves different accounts, investments made by owners are recorded in equity accounts, and asset purchases are documented in asset accounts. Each of these categories serves a distinct purpose in the accounting cycle, demonstrating how comprehensive financial records provide insight into a company's overall financial health.