Definition of Operating Expenses
The list of operating expenses comprises of the expenses that a company incurs while performing its day to day operations. These expenses include rent, salaries & wages, office expenses, telephone expenses, admin and insurance expenses, etc. As per accounting frameworks operating expenses refer to the expenses that arise in the course of ordinary activities of the entity. These expenses are recorded in the income statement of the company and help in assessing the profitability of the company for a specified period of time.
Explanation
Operating expenses commonly referred to as OPEX are unavoidable expenses that the company has to incur for the smooth running of its day to day business activities. Most of the time, the main goal of the management of the company is to maximize profit by increasing revenues and reducing expenses. Therefore, the management always looks for ways to reduce operating expenses but with no impact on the company’s ability to be head-on-head with the competitors.
But the management should always keep in mind that curtailing too much of operating expenses would curtail the company’s productivity and as a result profit too. Even if the reduction in a specific operating expense is helping to increase short-term profit, it can impact the company’s earning capacity in the long term. Accounting treatment of an operating expense is similar to other expenses when the expense is incurred the debit entry is made in the income statement, and the credit side would either increase the liability or decrease the asset. It generally depends on the nature of the transaction i.e. whether the expenses are paid through cash or credit.
List of Operating Expenses
The list of operating expenses is divided into two broad categories i.e. cost of goods sold and selling, general, and admin expenses in the income statement. The cost of goods sold is the cost or expenses, a company incurs while manufacturing the goods that the company sells. In this heading, we will majorly look at different types of operating expenses that are normally incurred by entities:
- Traveling Expenses: When the staff of the company incurs travel expenses which are required as part of their official duties i.e. official visit, these expenses are called as traveling expenses. An official visit would include, meeting with customers, selling prospects, official events. Sometimes these expenses are directly paid by the company and at other times these are being reimbursed by the company later on.
- Office Stationery and Supplies: These are expenses incurred to buy office stationery and supplies for the usage by the staff on day to day basis. Just like other operating expenses, this is also charged to the profit and loss account of the company.
- Utility Expenses: These expenses include water and electricity bills of the office. They are categorized as operating expenses as they help in the smooth running of the company’s day to day operations.
- Telephone Expenses: They represent landline or mobile expenses incurred while doing official tasks in office premises or using office mobile. Some companies also reimburse the employee’s home mobile and landline bills.
- Property Tax: The property tax paid on the office building by the company is also considered as an operating expense.
- Legal Expenses: All the legal and professional expenses incurred by the company for procuring the expert advice regarding legal and professional matters are also categorized as operating expenses.
- Repair and Maintenance Expenses: Any expense incurred on the repair and maintenance of an asset that is used for the production or manufacturing purposes is treated as an operating expense by the business.
- Insurance Expenses: Expenses incurred on fire insurance for premises, medical insurance, and general insurance of the staff are also treated as operating expenses since they help to secure the resources of the business.
- Advertising Expenses: Expenses incurred by the companies on promotion and advertising activities for the increase of sales is charged under the head of advertising expense in profit and loss account. This expense does not include trade discounts offered to the customers for the increase in sales.
- Research Expenses: Expenses that are incurred on the research of the new product to check their workability which cannot be capitalized as per the accounting standards are recognized as operating expenses.
- Cost of Goods Sold: The cost of goods sold refer to the direct expenses incurred towards the manufacturing or purchase of the products being sold, this includes direct material and labor expenses used in production, or in case of trading, purchases, and change in inventories.
Conclusion
List of operating expenses comprises one of the most important aspects of the business i.e. operating expenses. Operating expenses are necessary for the smooth running of the business. A company’s management is always trying to reduce expenses and increase profit. But they should be careful while doing this because reducing operating expenses may result in a short-term increase in profit, but can impact the company’s earning thelong-run.
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