Types of expenses

There are different types of expenses. In the income statement, expenses are categorized into a few major classifications (for e.g., cost of sales, admin expenses, selling expenses etc.) and totals of all expenses incurred in a particular period are reported in the income statement. These expenses are deducted from the revenues of that period to present the profit or loss for the period of the entity.

Following classifications or types of expenses are explained below.

  • Cost of sales
  • Operating expenses (general administrative and selling expenses)
  • Finance cost
  • Extraordinary expenses
  • Income tax expense

Cost of sales

These are direct and indirect expenses incurred by an entity to generate sales revenue. For instance, a manufacturing company incurs cost to purchase material, pays salaries and wages to labour, incurs factory overheads. All such costs incurred on the manufacturing of products that are sold by a company are included in the cost of sales. Similarly, if a company provides services to its customers, all expenses related to provision of those services to customers are included in the cost of sales.

Operating expenses

Operating expenses include expenses incurred by a company in running the day-to-day operations of the business. It generally includes following two major types of expenses:

  • General administrative expenses (It includes expenses incurred for running and improving the business such as salaries of executive management, expenses of administrative and HR departments, R&D expenses, training expenses, IT expenses etc.)
  • Selling expenses (It includes expenses incurred for selling the goods such as salaries and commission of sales staff, advertising, and marketing expenses etc.)

Finance cost

Finance cost includes expenses incurred related to borrowing of funds by the company such as interest on loan, interest on bank overdrafts, bank charges and fees for processing loans etc.

Extraordinary expenses

As the name suggests, these include any expenses that are not usual or regularly incurred by a company. As a one-off type of expense, these are separately presented on the face of the income statement. Example of extraordinary expenses include redundancy costs, loss on disposal of significant fixed asset, significant impairment of fixed assets etc.

Income tax expense

For jurisdictions where income tax is applicable, this category is also presented on the face of the income statement. Income tax expense is deducted from profit before tax to arrive at the figure of net profit for the accounting period. Income tax expense is calculated on the basis of relevant tax laws of the jurisdiction and includes both current tax expense and deferred tax expense.