Direct and Indirect Expenses

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:

Office and Administrative Expenses
Marketing, Selling and Distribution Expenses
Financial and other expenses

List of Direct Expenses

Purchases	Carriage	Carriage In
Carriage Inwards	Carriage on Purchases	Transportation Inwards
Cartage	Freight	Railway Charges
Insurance in Transit	Packing Charges	Landing and Wharf charges
Dock Charges	Clearing Charges	Import Duty
Excise Duty	Custom Duty	Octroi Duty
wages	Wages and Salaries	Manufacturing Wages
Wages Productive	Factory Wages	Manufacturing Expenses
Warehouse Charges	Factory Rent	Factory Electricity
Factory Light	Factory Lighting and Heating Expenses	Factory Insurance
Factory Rates	Motive 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

Salaries	Office Salaries	Salaries and Wages
Establishment Charges	Office Rent	Rent, Rates and Taxes
Office Expenses	Postage and Telecom	Office Telephone Charges
Printing and Stationery	Office Electricity	Legal Charges
Insurance	General Managers Commissions	General expenses

2. Marketing and Selling Expenses

Sales Salaries	Sales Expenses	Carriage Out
Carriage outwards	Freight Outwards	Delivery Expenses
Advertisement	Godown Rent	Commission (Dr.)
Salesmen and Managers Commission	Agent and Traveler’s Commission	Traveling Expenses
Discount Allowed	Sales Allowance	Bad Debts and Provisions/Reserves
Distribution of Free Samples	Trade Expenses and Subscriptions	Packing and Store Supplies Expenses

3. Financial and Other Expenses

Bank Charges	Interest on Overdraft	Interest on Loan
Interest on Capital	Audit Fee	Financial Charges
Depreciation	Depletion	Amortization
Repairs and Maintenance	Repairs and renewals	Loss on Sales of Assets
Loss by Theft	Loss by Accident	Loss by Fire
Discount on Discounted Bill	Sundry Expenses	Miscellaneous Expenses