Direct Expense vs Indirect Expense vs Misc Expense | Cost of Goods Sold vs Operating Expense vs Non Operating Expense | Business Expenses | Effect of Expense in Profit & Loss

Expenses refer to costs incurred in conducting business. Technically, expenses are "decreases in economic benefits during the accounting period in the form of decreases in assets or increases in liabilities that result in decreases in equity, other than those relating to distributions to equity participants".

Controlling expenses is an extremely important task for financial managers today. Optimization of expenses can help companies outperform the industry.

You may classify your Business Expenses into 3 different categories:

Cost of Goods sold	Operating Expenses	Non-Operating Expenses
Cost of goods sold is the carrying value of goods sold during a particular period. Costs are associated with particular goods using one of the several formulas, including specific identification, first-in first-out, or average cost. Cost of raw materials. Cost of parts used to make a product. Direct labor costs. Supplies used in either making or selling the product. Overhead costs, like utilities for the manufacturing site. Shipping or freight in costs.	An operating expense, operating expenditure, operational expense, operational expenditure or opex is an ongoing cost for running a product, business, or system. Its counterpart, a capital expenditure, is the cost of developing or providing non-consumable parts for the product or system. Utilities Software Rent Commissions and Fees Equipment rentals Office equipment Maintenance and repair Home office space Maintenance, repairs or maintenance Business Phone line (separate from home line)	A non-operating expense is an expense incurred from activities unrelated to core operations. Non-operating expenses are deducted from operating profits and accounted for at the bottom of a company's income statement. Insurance Furniture Bank fees & interest Meals Travel Employee retirement plans Employee education scheme Legal fees Mortgage interest Property taxes Insurance

All these Expenses can be recorded in Book Keeper in following ways:


Cost of Goods Sold: All the Purchases/Manufacturing vouchers that we record using items and it's rate. it will be included in the cost of Goods excluding Other Expenses.

Operating and Non Operating Expenses can be further classified as Direct or Indirect Expense:

Direct expense is an expense incurred that varies directly with changes in the volume of a cost object. A cost object is any item for which you are measuring expenses, such as products, product lines, services, sales regions, employees, and customers.

Indirect expenses are those expenses that are incurred to operate a business as a whole or a segment of a business, and so cannot be directly associated with a cost object, such as a product, service, or customer. A cost object is any item for which you are separately measuring costs.

Let's also find out the effect of Direct and Indirect Expense on your financial reports.

Here, you will notice that the direct expenses incurred by the Business has been deducted under Trading report computing the Gross Profit/Loss.

Whereas, the Indirect Expenses has been deducted  from the Gross Profit directly under Profit and Loss report to compute the Net Profit/Loss.