Operating Expenses on the Income Statement


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 balance sheets. In the income statement, these costs are reported after gross profit and the deduction of them from the gross profit is called net profit.

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

With this separating, users and management could also assess what is the cost that supports or 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. For those depreciation expenses that involved with productions or similar is reported to cost of goods sold.
  • Insurance costs: Insurance costs are normally charged to operating expenses if they are not involved with productions.
  • Legal fees: These are the fee occur, legal consultant.
  • Office supplies: Office suppliers normally charged to operating expenses since they are normally not expensive with short useful life.
  • Property tax expenses record in the operating cost.
  • Rent costs for administrative purposes or for sales staff which is not involved with the production.
  • Repair costs for machines or fixed assets that are not involved with the production.
  • Utility costs sharing excluding for production.
  • Advertising costs are kind of selling expenses.
  • Others operating cost
Related article  Transportation costs on the income statement (Explained)