Classification of Expenses
Each sort of expense is assigned to a distinct account. As a result, huge corporate organizations may have a significant number of accounts in their records.
As the profit and loss statement is a summary of the organization’s profitability. For reporting purposes, similar accounts should be grouped.
What are the Four types of Expense?
The following four are the most common expenditure classifications:
- Cost of goods sold
- Administration expenses
- Selling expenses
- Financial expenses
Cost of Goods Sold
It is the cost of acquiring or manufacturing the product that an organization is selling, plus any extra costs spent in bringing the product to a saleable state. The following accounts are included in the cost of goods sold:
- Acquisition of raw materials/goods.
- Wages are provided to employees for the production of commodities.
- On purchases, any applicable tax/freight is paid.
- Any costs associated with the carriage/transportation of purchased products.
These are the costs of efficiently running a firm. This group’s main components are:
- Utility bill payment.
- Rental payments
- Employee wages
- Expenses for general office operations
- Repair and maintenance of office equipment and vehicles.
The expenditures incurred directly in association with the sale of products are referred to as selling expenses. This category includes:
- Transportation/delivery of sold products
- On-sale tax/freight paid
- If the expense head ‘salaries’ contains sales staff salaries, they will be deducted from salaries and displayed under the head of ‘selling expenses’.
The interest paid on a bank loan and the charges deducted by the bank on the entity’s bank accounts are examples of financial expenditures. It includes:
- Loan markup
- Bank service fees
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