What Items Go Under Operating Expenses on an Income Statement?
When a business creates an income statement, it sometimes separates the revenue and expense items into sections on what’s called a multi-step income statement. This type of income statement helps owners analyze different aspects of the company’s performance. The operating expenses section is one of the main focal points. These expenses are the costs a small business incurs in its primary business activities during the accounting period. They are sometimes referred to as selling, general and administrative expenses or various combinations of the three.
Selling expenses are those a business incurs to market and sell its products and services to customers. Such items include sales commissions, wages and salaries for sales staff, rent and utilities for a sales office, advertising costs and promotional materials. For example, if your small business paid $200,000 in salaries and commissions to your sales staff and $30,000 in advertising, you would report these as selling expenses in the operating expenses section of the income statement.
General and administrative expenses are those necessary to run your main business operations that aren’t directly related to selling your goods and services. They include wages, salaries and benefits for non-sales employees, such as managers and accountants. They also include general office rent, property taxes, insurance, utilities, depreciation on assets and legal fees. For instance, if your small business pays $24,000 in rent, $2,400 in utilities and $150,000 in managers’ salaries, you would report these as general and administrative expenses in the operating expenses section.
Although operating expenses include a wide range of costs, certain items do not belong in the section. Any costs directly related to manufacturing inventory or the cost to buy inventory are part of the “cost of goods sold” line on the income statement, which is reported separately from operating expenses. Also, income tax expenses, interest expenses and losses on the sale of assets belong in the non-operating expenses section. This separation helps a business assess its core operating costs from period to period without the effects of financing or one-time charges.
There are various acceptable ways to report operating expenses on the income statement. You might categorize each expense within the operating expenses section using categories, such as “Selling Expenses” and “General and Administrative Expenses.” You also might condense all these expenses together on one line and label it “SG&A.” Alternatively, you can avoid any categories and simply list each expense in the operating expenses section. Regardless of the format, you should include the total amount of operating expenses at the bottom of the section.