14 Small Business Expense Categories to Consider

Instead, they support the overall revenue-generating activities of the business. Expenses incurred to sell goods and to operate the business are called indirect expenses (or operating 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. Cost of Goods Sold (COGS) is the cost of acquiring raw materials and turning them into finished products.

• Direct expenses are a major component of a business or company’s financial metric as it helps them to keep track of their spending.
• For example, paying less on advertising reduces costs but also lowers the company’s visibility and ability to reach out to potential customers.
• Just like direct expenses, indirect expenses can also be different for diverse organisations.
• Cost of Goods Sold (COGS) is the costs incurred while acquiring raw materials and then turning them into finished goods.
• As a result, general and administrative expenses do not fall under cost of goods sold and are not inventory.
• For smaller businesses, or those that only use an office landline, your monthly bill can be expensed to your utilities account.

Controllable costs are considered when the decision of taking on the cost is made by one individual. Common examples of controllable costs are office supplies, advertising expenses, employee bonuses, and charitable donations. Controllable costs are categorized as short-term costs as they can be adjusted quickly.

Differentiate Between Expenses and Expenditure

Lastly, you can even make your bookkeepers or accountants, or CPAs a part of your Deskera Books account by giving them access through an invitation link. Further on, having a complete understanding of your expenses will also help you in identifying all those expenses that you can write off, hence reducing their taxable income and subsequently their tax liability. This is because, without you understanding your expenses, your business functioning would continue to remain incomplete. In fact, without incurring expenses, you would not be able to generate revenue from your business. This is precisely what you are worried about, bringing you here to this article, hoping to get a complete understanding of expenses in accounting. While expenses in accounting sound like a very complex subject, it is a very important one at that.

Other categories include the owner’s equity, assets, liabilities, and revenue. Expenses in double-entry bookkeeping are recorded as a debit to a specific expense account. A corresponding credit entry is made that will reduce an asset or increase a liability. Operating expenses include all costs that are incurred to generate operating revenues like merchandise sales.

How to Categorize Expenses: 14 Small Business Expense Categories to Consider

In real-world accounting practice, there are very few items that are classified as direct expenses. Generally, the heading Direct Expenses is ignored in the preparation of accounting statements. Examples of expenses include routine expenses such as purchases, salaries, commissions, and utility bills.

An example of this is the legal expense incurred on the purchase of a building. The cost of employees that work on creating a long term asset for the business, such as a building or a website is not expensed list of expenses in accounting immediately in the income statement. As the diagram above illustrates, there are several types of expenses. The most common way to categorize them is into operating vs. non-operating and fixed vs. variable.

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Motor vehicles and machinery need to be maintained on a continuous basis and repaired whenever they break down. Periodic expenses are expenses that happen infrequently and are hard to plan for, such as car repairs or an emergency trip. Accountants, lawyers, tradesmen, security, marketing consultants – all of these would be considered ‘professional services’.

Whether that result is good or bad depends on the norm for her industry. Not many general and administrative expenses are variable; therefore, reducing administrative expenses is a difficult proposition. You can also use an independent “Cost of Sales A/c” to list the expenses on the profit and loss account. You’ll also want to check out IRS Publication 535; Business Expenses, for a more complete explanation of business expenses and exactly what you can deduct. Revenues accounts are credited when the company earns a fee (or sells merchandise) regardless of whether cash is received at the time. And, last but not least, creating an expense account is all part of managing your accounting books.

What are total expenses, and how do you track them?

Operating expenses may also be known as Selling, General, and Administrative (SG&A) expenses. They’re the costs a company generates that don’t relate to the production of a product. Direct expenses are completely related to the core business operations of a business. The main logic to categorising any expense as indirect is to ask yourself, “is the cost directly linked and attributable to the primary income-generating product of the company? Direct and Indirect costs can be declared on the income statement as expenditures since a personal service company does not hold inventory. AccountEdge Pro is designed to make life easier for small business owners.

• However, the electricity used to power the plant is considered an indirect cost because the electricity is used for all the products made in the plant.
• If so, check out our article on Small Business Tax Deductions where we have compiled a list of expenses that you can write off on your taxes.
• In most cases, salary is an indirect expense shown in the profit & loss account.
• Wages of employees depend on the demand for products and their manufacture.
• The following sections describe the common types of costs that are typically included in the operating, general and administrative expenses.
• Hence, expenses in accounting are the cost of doing business, including a sum of all the activities that will hopefully generate profit for you.

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