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:

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

 

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