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 |