How To Accounts Expenses : "All About Expenses"

All About Expenses

What are expenses??????

Yeah! Today we are going to learn about expenses in the P/L (Profit & Loss) Statement. Expenses are the items that are to be deducted to the income that has been made for the particular period in order to get into either profit or loss for the period.

Expenses can be divided into direct and indirect expenses, direct expenses are those that are related to the activity that are vital and can be directly attributable to the product cost while calculating the cost of the products and should be included in the Cost of Goods Sold (COGS) figure. This type of expense has been already dealt in previous article. These are to be deducted before coming out to the Gross Profit figure.

Indirect expenses are the expenses that cannot be specifically attributable to the particular product cost as they are related to the expenses not directly related to the product costing that the organization primarily operates its business with and should be deducted after we come up to the Gross Profit figure in P/L.  Expenses like Selling and Administration expenses the sub-category can be the rent of the office, salary of the office employees, electricity bills, water bills, commission related expenses and so on.

Let me put further light on this, to categories the direct and indirect expense, there is a nice example.  Suppose, A company deals with the manufacturing and sales of shoes, then the rent to the factories can be assigned to the direct expenses but the rent to the administration offices or head offices should be categorized as the indirect expenses as these expenses are support related to the primary function of the organization which is the production of the shoes. The office rent is mere an expenditure which is not directly related to the production of the product that company uses to generate income.

These indirect expenses have various headings according to their nature. The expenses related to the marketing activities can be assigned to sales and marketing expenses. The expense related to the office administration can be grouped in “Administration expenses” which can further be sub-divided into various categories like office rent, utility expenses, salary expense etc. The heading of the expense should be linked to the nature of the expenses to deter any complication regarding the                         mis-interpretation it can bring else categorized differently.

Typically, there are these sorts of expenses you can see in P/L statement in most of the organization:

Depreciation Expenses:

This relates to the depreciation charged for fixed assets that has been deducted for the particular period (mostly on yearly basis).

Selling and Marketing Expenses:

This relates to the expense that has been charged against the expenditure that has been made in relation to the marketing and sales like commission, advertising etc.

Rent Expenses

Like discussed above Rent Expense relates to the rent that has been paid, the indirect nature, for the building that has been used to operational, administration nature etc. other that the factory rent.

Salary Expenses

Salary Expenses relates to the salary related to the expenditure made against the salary paid to the office staffs working for the department other than the production/manufacturing department (which relates to the production cost). All the indirect nature of salary goes into this heading.

Interest Expenses

Interest Expenses relates to the interest expenditure that has been paid and/or accrued against the loan for the particular period.

Now, the accounting part,

All, the expenses will go into the debit side of the journal entries as there is a thumb nail rule that  “all expenses are debits” and “all income are credits”.

So, let’s do one example, to make it simple I am not going to discuss any further liability that is to be assigned when performing entries regarding the expenses like rent & salary. Like in many countries there is a tendency to deduct tax at source when paying to the employees and to some creditors. To make things simpler, let’s exclude this from this example:

So, suppose Company A pays rent of $100,000 yearly on the office rent to Jhon Anderson. Then, what will the accounting entry for the rent expense?????

Simple, its      Dr. Rent Expenses       $100,000       Cr. John Anderson    $100,000.

And, when the company actually pays the bills to John Anderson, the accounting entry should be:

Dr. John Anderson     $100,000                                  Cr. Cash/Bank              $100,000.

 

Similarly, we can do accounting entries for various expenses like this, for small miscellaneous (sundry expenses) it can be paid directly through cash without creating various entries. Like, if, Company A pays the bills related to the office meal against the meal served at office meeting.  Actually, it is defined by the company, the nature and limit (in terms of cash) that can be expensed directly from Cash expenses. If the above example fulfills the nature (that can be directly expensed from cash) then the accounting entry become:

Dr. Sundry Miscellaneous expenses                    $200.                          Cr. Cash                   $200.

Ok, this is it for now, I think now you have an idea in relation to the expenses and I guess I have made it simpler to understand. If you have any questions regarding this topic, you can ask that in the comment section.

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