Accounting Basics: Types of Expense Accounts

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Many basic accounting rules and conventions apply to categorizing accounts identically for all businesses. At times, other account titles or categories might be industry- or company-specific. Most of the balance sheet categories, assets, liabilities, and owners' (or stockholders') equity, are common to almost all businesses, except non-profits, educational institutions, and governments. Income and expense categories, while primarily using common account titles, may contain company-specific differences. There are, however, three primary expense categories common to most businesses.

Cost of Goods Sold

Cost of goods sold includes your inventory.
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A manufacturing business or any business that sells products has a cost of goods sold category. These expense accounts typically include beginning and ending inventory valuations, freight and shipping of product, bad debts created by sales and non-payment, and other costs that directly relate to the items sold by the company. Some organizations also include compensation expenses that are directly related to the products made and/or sold, e.g., sales compensation or direct labor.

Operating Expenses

Operating expense is the largest category.
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Usually the largest expense category (by the number of accounts, at least) are operating expenses, which identify all normal costs that relate to the day-to-day necessities of the organization. In this category, basic accounting rules specify the inclusion of compensation, benefits, local, state, and federal payroll taxes, office expenses, supplies, postage, travel and entertainment, advertising (amounts not included in the cost of goods sold category), repairs and maintenance, depreciation (the non-cash expense of writing “down” the cost of some assets over time), mortgage or rent of facilities, utilities (telephone, electricity, heat, and air conditioning), and professional fees (accountants and attorneys).

Non-Operating Expenses (or Other Expenses)

Interest charges are a type of non-operating expense.
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This category typically includes all other expenses that the organization deems outside of operations. For example, corporate income taxes are often placed in this category. Companies identify federal and state corporate income taxes after they determine their net income (or net profit) for the fiscal or calendar year. Unlike compensation, travel, or repairs, income taxes are not calculated (or paid) until after all operations for the accounting period have closed.

Employee and Officer Expense Accounts

Expense accounts.
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Accounting expense account classifications should not be confused with employee and officer expense accounts, which are usually operating expenses. Employee and officer expense accounts are not typically specified in the income statement (profit and loss statement) for a good reason. These accounts are designed to categorize amounts spent by employees, management, and/or board of director members for the efficient performance of their duties. For example, travel and lodging is often a major component of expense accounts. However, on the income statement, the total for all forms of travel and lodging will correctly appear in the travel or travel and entertainment account on the income statement.



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