Operating Expenses on the Income Statement

Definition:

Operating expenses are the operating costs that occurred by an entity as the result of its daily operating activities and those are recording the income statement bases on the accrual principle.

These costs are different from the cost of goods sold since they are not directly associated with the cost of goods or services.

Operating expenses included salaries expenses for operating staff, rental expenses, utility expenses, as well as transportation costs

Operating expenses are sometimes called administrative expenses and record only in income statements rather than on balance sheets.

In the income statement, these costs are reported after gross profit, and their deduction from the gross profit is called net profit.

The idea of separating costs into two: Cost of goods sold and operating costs for the benefit of users and the entity’s management. Management and users of financial statements could assess how profitable the entity is after deducting the cost that is directly associated with goods or services.

With this separation, users and management could also assess what is the cost that supports operation and sales and how much those expenses are affected by the entity.

List of items in operating expenses:

  • Depreciation expenses: This is only for depreciation expenses that occur for operating activities only. Those depreciation expenses involved in productions or similar are reported to the cost of goods sold.
  • Insurance costs are normally charged to operating expenses if not involved with productions.
  • Legal fees or Professional fees: These are the fees for a legal consultant.
  • Office supplies: Office suppliers are normally charged for operating expenses since they are normally not expensive with short useful life.
  • Property tax expenses are recorded in the operating cost.
  • Rent costs for administrative purposes or sales staff who are not involved with the production.
  • Repair costs for machines or fixed assets not involved with the production.
  • Utility costs sharing excluding production.
  • Advertising costs are a kind of selling expenses.
  • Others operating cost
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