Expenses are a necessary evil, we all have them. You may not think about them every day but they’re always there lurking in the background of your life. They can be overwhelming and stressful if you don’t keep up with them or know what to do when unexpected expenses come up.
When it comes to business, expenses are even more important to track and manage. Not doing so can lead to big problems down the road. That’s why we’ve created this guide for you. In it, we’ll cover the definition of business expenses, different types of expenses, and some examples to help you get a better understanding.
What are Expenses
An expense is any cost incurred by a company in the course of running its operations. It can be anything from the cost of raw materials to the salaries of employees.
These costs can be divided into two broad categories: operating expenses and capital expenses.
- Operating expenses: Operating expenses are those costs incurred in the day-to-day operations of a business, such as rent, utilities, office supplies, and payroll.
- Capital expenses: Capital expenses are those costs incurred in the acquisition or expansion of a business, such as the purchase of machinery or real estate.
Types of Expenses
There are dozens of different types of expenses, but they can all be classified into one of four categories:
- Cost of goods sold (COGS)
So the first category is the cost of goods sold, or COGS for short. This includes the direct costs associated with making or selling a product, such as the cost of raw materials and labor. It is a crucial number for businesses because it directly impacts their bottom line.
- Selling, general, and administrative expenses (SG&A)
The second category is selling, general, and administrative expenses, or SG&A. This includes all the costs associated with running a business that is not directly related to making or selling a product. These can be things like marketing and advertising expenses, office rent, and employee salaries.
- Depreciation and amortization
The third category is depreciation and amortization. This includes the costs of wear and tear on assets, such as equipment or vehicles. It’s important to note that these costs are not actually cash expenses, but they still need to be tracked and accounted for.
The fourth and final category is taxes. This includes all the various taxes a business has to pay, such as income tax, payroll tax, and sales tax. Now you can’t do much to reduce these expenses, but it’s still important to be aware of them and account for them in your financial planning.
Examples of Expenses
Now that we’ve covered the basics, let’s take a look at some specific examples of expenses.
- Rent: Rent is a common operating expense for businesses. It includes the cost of leasing or renting office space, warehouse space, or retail space.
- Utilities: Utilities are another common operating expense. They include the costs of things like electricity, gas, water, and sewage.
- Office supplies: Office supplies are a necessary part of doing business and can be a significant expense for some companies. This category includes things like paper, ink, toner, pens, and pencils.
- Employee salaries: Employee salaries are one of the biggest expenses for most businesses. It can include the cost of wages, benefits, and taxes.
- Marketing and advertising: Marketing and advertising expenses can be a big expense for businesses. It includes things like advertising in newspapers or magazines, sponsoring events, and hiring a public relations firm.
- Vehicle expenses: Vehicles are often a necessary part of doing business. They can be used for shipping goods, traveling to meet customers, or making deliveries. The cost of operating and maintaining vehicles can be a significant expense for some businesses
- Interest on loans: Interest on loans is another common business expense. It includes the cost of interest paid on business loans, such as mortgages, lines of credit, and equipment loans.
So there you have it. Now you know what expenses are and some of the different types that businesses have to deal with. Keep in mind that this is just a brief overview and there are many other types of expenses not covered here. But if you’re just starting out in business, this should give you a good foundation to work from.
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