Operating expenses are the expenses that are incurred in the natural course of business. These expenses generally consist of the selling and administration expenses. These expenses are revenue in nature since these are incurred in the day-to-day operations of the business and do not incur on the non-current assets.
The nature of the operating expenses is revenue. Therefore, these expenses are not capitalized. Unlike capital expenses that are incurred to support the operations of the business or in the extension of operations, these expenses are supporting in nature and are incurred to carry out the small operations.
With the help of examples of operating expenses, you will be able to understand their nature better and their role in the operations of the company. Below are some operating expenses:
- Rent and rates
- Utility bills (electricity, telephone, gas)
- Maintenance of Petty cash Imprest system
- Maintenance, repairs & decorations (not the repairs of the non-current assets)
- Sundry expenses
- Depreciation expense
- Amortization expense
- Sales commissions
- Employee benefits
- Employer contributions in the employee pension scheme
- Accounting fee, legal fee or any other professional fee
- Advertising and marketing costs
- Sundry expenses
- Insurances and premiums paid
- Supplies and office equipment
In short, all the expenses that are revenue in nature and have a supporting role in the operations of business are operating expenses. It is important to understand that the expenses incurred on the initial repairs of the asset to make it useable or the legal costs in the acquiring of assets are not operating expenses. Similarly, the costs incurred in the issuance of shares, debentures are also capital expenditures, and they cannot be treated as operating expenses and deducted from the income statement.
The reporting of operating expensesThe operating expenses are included in the income statement of the company are deducted from the gross profits to reach to the figure of net profit before interest and tax. Since these expenses are not associated with the production, these are reported as day-to-day expenses. In the income statement, these expenses are generally subdivided into selling, admin and general expenses.