What Is the Difference Between an Operating Account vs. Expense Account?
Operating accounts play an important role in an organization's activities, similar to expense accounts and revenue items. Accounting regulations -- such as international financial reporting standards and generally accepted accounting standards -- indicate to financial managers how to distinguish between operating and expense accounts, how to record them and the proper way to report them.
An expense account typically ties to an item making a company spend money, but there also are non-cash cost accounts that reduce the organization’s income. If you hear finance people using terms such as cost, expense, charge and outlay, just note they’re referring to the same thing. Expense accounts run the whole operating gamut, from merchandise cost and interest to selling, general and administrative outlays, and these SG&A outlays cover anything from rent and litigation to insurance, office supplies, travel and business entertainment. Non-cash expense accounts include depreciation, amortization and depletion.
When the economy is dismal and a business hardly is making operating ends meet, senior leadership attempts to run a tight ship. This means corporate executives direct department heads to come up with expense-reduction tactics, identify areas that are bleeding money and figure out ways to curb operating costs. The idea is to sow the seeds of future profitability, control who spends how much on what and maintain sufficient cash in operating coffers -- not to query segment managers, dollar for dollar, on smallest expenses.
Operating accounts show how the business generates revenues and expands market share, as well as the items that drag operating activities down to the earnings basement. Operating accounts -- or financial accounts -- range from assets and liabilities to equity items, revenues and expenses. In essence, this quintet incorporates all accounts a business relies on to operate. As a result, an expense account is an operating account, but the opposite doesn’t always hold true.
Operating accounts constitute the conceptual fulcrum around which an organization builds its bookkeeping and financial reporting practices. These accounts help the business publish accurate, complete financial data summaries at the end of a given period -- say, a month, quarter or fiscal year. A full set of accounting reports includes a balance sheet, an income statement, an equity statement and a cash flow statement.