Direct and Indirect Expenses

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Expenses

The cost which has been expired in the process of earning income is called an expense. In simple words, the cost of doing business is called expenses. These include the routine expenses like purchases, salaries, commission, utility bills etc. In other words, expenses are the cost of the goods and services used up in the process of earning revenue.

Expenses appear in trial balance are of the following two kinds:

1. Direct Expenses
2. Indirect or Operating Expenses

Direct Expenses


Expenses which are incurred to manufacture or purchase goods and to bring them into saleable condition are called direct expenses. Direct expenses become the part of cost of the goods manufactured or purchased.

These are the costs other than materials and wages, which are incurred for a specific product and
without which the production of that specific product would not be possible.

Example

The example can be given of royalties paid to an author of a book which can neither be described as direct material nor direct labor yet an author’s efforts are essential for production of the book. Similarly, a company may acquire rights to manufacture a product whose patent or trademark rights are held by another company and agree to pay a small fee or royalty for using such trademark or formula for production.

Such payments also fall within the meaning of direct expenses. However, in actual practice, there are very few items that come within this definition and generally, the heading Direct Expenses is ignored in preparation of accounting statements.

Indirect Expenses

Expenses incurred to sell goods and to operate the business are called indirect expenses or operating expenses. These expenses are classified into the following three groups:

  1. Office and Administrative Expenses
  2. Marketing, Selling and Distribution Expenses
  3. Financial and other expenses

List of Direct Expenses

 

PurchasesCarriageCarriage In
Carriage InwardsCarriage on PurchasesTransportation Inwards
CartageFreightRailway Charges
Insurance in TransitPacking ChargesLanding and Wharf charges
Dock ChargesClearing ChargesImport Duty
Excise DutyCustom DutyOctroi Duty
wagesWages and SalariesManufacturing Wages
Wages ProductiveFactory WagesManufacturing Expenses
Warehouse ChargesFactory RentFactory Electricity
Factory LightFactory Lighting and Heating ExpensesFactory Insurance
Factory RatesMotive Power
1. Gas
2. Fuel
3. Power
4. Coal
5. Coke
Consumable Stores:
1. Lubricating Oil
2. Grease
3. Cotton Waste
Raw Material
1. Tallow
2. Cotton Seeds
3. Oil Seeds
4. Jute
Royalty

List of Indirect Expenses

1. Office and Administrative Expenses

SalariesOffice SalariesSalaries and Wages
Establishment ChargesOffice RentRent, Rates and Taxes
Office ExpensesPostage and TelecomOffice Telephone Charges
Printing and StationeryOffice ElectricityLegal Charges
InsuranceGeneral Managers CommissionsGeneral expenses

2. Marketing and Selling Expenses

Sales SalariesSales ExpensesCarriage Out
Carriage outwardsFreight OutwardsDelivery Expenses
AdvertisementGodown RentCommission (Dr.)
Salesmen and Managers CommissionAgent and Traveler’s CommissionTraveling Expenses
Discount AllowedSales AllowanceBad Debts and Provisions/Reserves
Distribution of Free SamplesTrade Expenses and SubscriptionsPacking and Store Supplies Expenses

3. Financial and Other Expenses

Bank ChargesInterest on OverdraftInterest on Loan
Interest on CapitalAudit FeeFinancial Charges
DepreciationDepletionAmortization
Repairs and MaintenanceRepairs and renewalsLoss on Sales of Assets
Loss by TheftLoss by AccidentLoss by Fire
Discount on Discounted BillSundry ExpensesMiscellaneous Expenses

 

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