Expense

6

Th is chapter defi nes the concept of expense and de-
scribes the manner in which expense is classifi ed.

Defi ning Expense.

6.1 Expense (1) is a decrease in net worth resulting
from a transaction. Expense transactions as defi ned
in GFS have counterpart entries either in a decrease
in assets or an increase in liabilities—thereby de-
creasing net worth. Th e general government sec-
tor has two broad economic responsibilities: (i) to
assume responsibility for the provision of selected
goods and services to the community, primarily on a
nonmarket basis; and (ii) to redistribute income and
wealth by means of transfers (see paragraph 2.38).
Th ese responsibilities are largely fulfi lled through ex-
pense transactions, which are classifi ed in two ways
in GFS: an economic classifi cation and a functional
classifi cation.

6.2 Th e economic classifi cation of expense identi-
fi es the types of expense incurred according to the
economic process involved. When supplying goods
and services to the community, a government unit
may produce the goods and services itself and dis-
tribute them, purchase them from a third party and
distribute them, or transfer cash to households so
they can purchase the goods and services directly.
For example, compensation of employees, use of
goods and services, and consumption of fi xed capital
all relate to the costs of producing nonmarket (and,
in certain instances, market) goods and services by
government. Subsidies, grants, social benefi ts, and
transfers other than grants relate to transfers in cash
or in kind, and are aimed at redistributing income
and wealth.

6.3 Th e functional classifi cation of expense pro-
vides information on the purpose for which an
expense was incurred. Examples of functions are
education, health, and environmental protection. Th e
functional classifi cation is described in the annex to

this chapter.^1 In addition, the economic and func-

tional classifi cations can be cross-classifi ed to show

the types of transactions engaged in to carry out

a given function (see the annex to Chapter 6, para-

graphs 6.126–6.148).

6.4 Refunds, recoveries of overpayments, receiv-

ables on erroneous payments, and similar transac-

tions are transactions that increase net worth. More

accurately, they are adjustments that correct the ex-

cessive decrease in net worth previously recorded.

Th ese transactions are treated as a reduction in ex-

pense, with a corresponding reduction in liabilities or

an increase in fi nancial assets.

6.5 Some transactions are exchanges in assets and/

or liabilities and should not be recorded as expense.

Th e acquisition of a nonfi nancial asset by purchase or

barter does not aff ect net worth, and such transactions

are not an expense. Th ey are transactions in nonfi -

nancial assets, as described in paragraph 8.3. How-

ever, when ownership of an asset is given up without

receiving anything of commensurate value in return,

the net worth of the unit has decreased. Th is reduc-

tion in assets has a counterpart entry in an increase

in expense and should be recorded as a type of capi-

tal transfer payable, such as a capital grant. Amounts

payable on loans extended and repayments on loans

incurred are also not an expense. Th ese are transac-

tions in fi nancial assets or liabilities as described in

paragraph 9.3.

Time of Recording Expense

6.6 In the Statement of Operations, expense should

be recorded according to the accrual basis of record-

ing. According to the accrual basis of recording, trans-

actions are recorded when activities, transactions,

or other events occur that create the unconditional

(^1) In GFS, the functional classifi cation is applied to expenditure—
that is, the sum of expense transactions and net investment in
nonfi nancial assets.