Administrative expense
Administrative expenses is an an income statement category, for expenses and costs not linked to th production of specific goods, but including general company expenses such as salaries for executives, research, facilities maintenance, and office supplies.
Administrative expenses are more likely to be listed on the income statement with the term "General and admnnistrative" expenses, or "Selling, General and admnistrtaive expenses." (in which case selling expenses are also included). These expenses may also be listed on the income statement under "Operating expenses."
As an income statement category, Selling, general, and administrative expenses is sometimes used synonymously with the term Operating expenses. In any case, on the income statement, administrative expenses appear below (after) gross profit. They do not, therefore, not enter the gross margin calculation. For this reason, SG&A expenses are sometimes called "below the line" costs.
Administrative expenses are further explained below in the context of other expenese-related terms and the income statement.
Expense items
Expense Categories and Example Items
Expense Contribution to Gross Profit, Operating Profit, and Net Protit
Expenses: Example Income Statement
Expense items
In simple terms, an expense is usually something a company or organization spends money on (however, exceptions include non-cash expenses, such as depreciation expense or bad debt expense).
Primary expense categories on the income statement are
• Cost of goods sold expenses (or Cost of sales expenses).
• Operating expenses (including Selling, general & administrative expenses).
• Financial expenses.
• Extraordinary item expenses.
More formally, an expense is a decrease in owner’s equity caused by the using up of assets in producing revenue or carrying out other activities that are part of the entity’s operations. Every expenditure transaction calls for an impact on an expense category account.
Expense spending is normally planned, authorized, and managed through budgets developed during the budget cycle in the organization's budget process. Most expense spending appears either in the organization's Operating budget or the Capital budget, or sub-categories of these (such as the Marketing budget, or the Manufacturing Budget). Some spending of non-budgeted funds may be necessary, however, which may be classified, for instance, as non budgeted spending (or emergency spending, or supplemental funding).
In the language of double entry bookkeeping, transactions with expense category accounts are nearly always debits, which for these accounts means an increase in account balance. Every debit to an expense account will be accompanied by an equal, offsetting credit transaction with a non-expense category account (e.g., asset account, or liability account. See the encyclopedia entry double entry system for more on offsetting debit and creidt transactions).
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Expense Categories and Example Items
Expenses and expense category accounts appear under four or five major categories on the income statement:
- Expenses for Cost of goods sold (COGS) (or Cost of sales).These are the expenses directly associated with producing goods or delivering services.
Example may include:
• Direct materials expense for manufactured goods.
• Direct costs of service delivery (e.g., direct labor costs for service delivery).
• Purchase of finished goods inventory to be sold.
• Direct labor for manufacturing.
• Manufacturing overhead expense.
– Indirect labor expense.
– Depreciation expense of production equipment.
– Other manufacturing / production / delivery overhead.
• Indirect costs of service delivery - Operating Expenses - Selling Expenses. These are the expenses for selling, including such things as:
• Store/shop rental, maintenance expense.
• Sales salaries, commissions.
• Advertising expense.
• Depreciation expense for selling assets
(e.g., bar code reading point-of-sale systems). - Operating Expenses - General & Administrative Expenses. These are essentially expenses for running the company in its normal line of business, which may include such things as: • Executive salaries and other wages and salaries for employees.
not engaged in manufacturing or selling.
• Research and development funding.
• Expenses for travel and training.
• IT support expenses (when IT supports the entire organization).
• Depreciation expense for Property, Plant & Equipment assets
and other assets not solely dedicated to manufacturing or sales.
[ Note, the two kinds of operating expenses above are sometimes combined in a single category, "Selling, General & Administrative Expenses".] - Financial Expenses (for companies not in a financial industry)
These are expenses associated with borrowing funds, or making money from financial investments. These may include
• Loan origination fees
• Interest paid on borrowed funds. - Extraordinary expenses. these are expenses for one time events or transactions, or non recurring actions that are not part of the company's normal business operations. These may include expenses from
• Workforce reduction, laying off employees.
• Sale of land, buildings, or real estate.
• Sale or disposal of other significant assets.
• Selling a business.
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Expense Contribution to Gross Profit, Operating Profit, and Net Profit
Knowing which of the above four high level expense categories a given expense item belongs in is important for at least two reasons:
- The expense category determines which expense budget includes this item, and
- The expense category determines which of the several profit calculations on a company's income statement the expense item impacts.
Expenses for Cost of goods sold items (such as direct manufacturing labor, or manufacturing overhead) impact are subtracted from Sales revenues to produce Gross profit and Gross Margin.
Operating Expenses (usually classified as Selling, General, and Administrative Expenses, or divided into two categories, "Selling" and
General and Administrative") are subtracted from Sales revenues—along with Cost of goods sold expenses—to produce operating profit and operating margin.
Extraordinary item expenses and Financial item expenses are normally reported below the operating profit line on the income statement (unless the company is in a financial industry, in which case financial expenses may be part of its normal business).
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Expenses: Example Income Statement
A example of a typical company's income statement showing the expense categories, and how they contribute to different profits, appears here:
Grande Corporation Gross sales revenues.................33,329 Gross profit.................................10,940 Operating expenses Operating income before taxes............... 3,130 Financial revenue & expenses Income before tax & extraordinary items..... 2,737 Extraordinary items Net Income (Profit).......................... 2,126 |
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