Examples of Department Specific Expenses and Common Expenses

An operating expense tied to compensation could include pension plan contributions, sales commissions or benefits, and pay for non-production employees. This could be anything from hiring a freelancer, needing a plumber for those broken pipes or needing a Certified Public Accountant (CPA) to remedy the books.

An expense in accounting is the money spent, or costs incurred, by a business in their effort to generate revenues. Essentially, accounts expenses represent the cost of doing business; they are the sum of all the activities that hopefully generate a profit.

Sales and marketing departments often accrue different operating expenses such as costs for advertising, sales materials, travel, direct mailings and entertainment provided for clients and customers. Some of these costs are infamously ballooned especially those like hotel bills, expensive dinners out, and first-class plane tickets. Executives are known to abuse the privilege of an expense account, which is why many businesses have accountants who are responsible for controlling those who have a heavy hand with the company credit card.

An expense is defined in the following ways:

• Office supplies use up the cash (asset)
• Depreciation expense, which is a charge to reduce the book value of capital equipment (e.g., a machine or a building) to reflect its usage over a period.
• A prepaid expense, such as prepaid rent, is an asset that turns into a cash expense as the rent is used up each month

Cost of Goods Sold

Some companies also include the costs of goods sold (COGS) as an operating expense. For example, direct labor or rent for production facilities may be classified as different types of operating expenses. In addition, compensation and benefits for production personnel and direct labor may be classified under operating expenses for accounting purposes. When considering the COGS, a company may consider the cost of direct materials, repairs of facilities and equipment and property taxes on production facilities as an expenditure classified as an operating expense.

Companies that do this do so because they believe that expanding their year-end operating budget might secure the excess funding they need for the next year. These types of expenses are better listed in a separate section than under the general umbrella of operating expenses, although many companies still operate this way.

The primary difference between an operating expense and an administrative expense is that types of operating expenses are related to the departments that produce products and services whereas administrative expenses are more general and not necessarily specific to a department within the company. For example, employees such as receptionists or secretaries may be compensated as part of administrative expenses. Postage, telephone bills and general office supplies shared by all departments also typically are not classified as operating expenses. Instead, these general expenses are considered administrative costs.

Types of Expenses

Expenses affect all financial accounting statements but exert the most impact on the income statement. They appear on the income statement under five major headings, as listed below:

1. Cost of Goods Sold (COGS)

Cost of Goods Sold (COGS) is the cost of acquiring raw materials and turning them into finished products. It does not include selling and administrative costs incurred by the whole company, nor interest expense or losses on extraordinary items.

• For manufacturing firms, COGS include direct labour, direct materials, and manufacturing overhead.
• For a service company, it is called a cost of services rather than COGS.
• For a company that sells both goods and services, it is called cost of sales.

Examples of COGS include direct material, direct costs, and production overhead.

2. Operating Expenses: Selling/General and Admin

Operating expenses are related to selling goods and services and include sales salaries, advertising, and shop rent.

General and administrative expenses include expenses incurred while running the core line of the business and include executive salaries, R&D, travel and training, and IT expenses.

3. Financial Expenses

They are costs incurred from borrowing from lenders or creditors. They are expenses outside the company’s core business. Examples include loan origination fees and interest on money borrowed.

4. Extraordinary Expenses

Extraordinary expenses are costs incurred for large one-time events or transactions outside the firm’s regular business activity. They include laying off employees, selling land, or disposal of a significant asset.

5. Non-Operating Expenses

These are costs that cannot be linked back to operating revenues. Interest expense is the most common non-operating expense. Interest is the cost of borrowing money. Loans from banks usually require interest payments, but such payments don’t generate any operating income. Hence, they are classified as non-operating expenses.

Non-Cash Expenses

Under the accrual method of accounting, non-cash expenses are those expenses that are recorded in the income statement but do not involve an actual cash transaction. Depreciation is the most common type of non-cash expense, as it reduces net profit, but is not a result of a cash outflow.   The accounting transaction and its impact on the financial statements are outlined below.:

• A debit to a depreciation expense account and a credit to a contra asset account called accumulated depreciation
• On the balance sheet, the book value of the asset is decreased by the accumulated depreciation.