Updated July 19, 2023
Definition of Operating Expenses
The list of operating expenses comprises the expenses that a company incurs while performing its day-to-day operations. These expenses include rent, salaries & wages, office expenses, telephone expenses, admin and insurance expenses, etc. As per accounting frameworks, operating expenses refer to the expenses that arise during the ordinary activities of the entity.
Explanation
Operating expenses, commonly referred to as OPEX, are unavoidable expenses that the company has to incur for the smooth running of its day-to-day business activities. Most of the time, the main goal of the company’s management is to maximize profit by increasing revenues and reducing expenses. Therefore, the management always looks for ways to reduce operating expenses without impacting the company’s ability to be head-on-head with the competitors.
But the management should always keep in mind that curtailing too much of operating expenses would curtail the company’s productivity and, as a result, profit too. Even if the reduction in a specific operating expense is helping to increase short-term profit, it can impact the company’s earning capacity in the long term. The accounting treatment of an operating expense is similar to other expenses.
List of Operating Expenses
The list of operating expenses is divided into two broad categories i.e. cost of goods sold and selling, general, and admin expenses in the income statement. The cost of goods sold is the cost or expenses a company incurs while manufacturing the goods that the company sells.
- Traveling Expenses: When the company staff incurs travel expenses that are required as part of their official duties i.e. official visit, these expenses are called traveling expenses. An official visit would include meeting with customers, selling prospects, and official events. Sometimes these expenses are directly paid by the company, and at other times, these are reimbursed by the company later on.
- Office Stationery and Supplies: These are expenses incurred to buy office stationery and supplies for usage by the staff on a daily basis. Just like other operating expenses, this is also charged to the profit and loss account of the company.
- Utility Expenses: These expenses include water and electricity bills for the office. They are categorized as operating expenses as they help in the smooth running of the company’s day-to-day operations.
- Telephone Expenses: They represent landline or mobile expenses incurred while doing official tasks on office premises or using an office mobile. Some companies also reimburse the employee’s home mobile and landline bills.
- Property Tax: The property tax paid on the office building by the company is considered an operating expense.
- Legal Expenses: All legal and professional expenses incurred by the company for procuring expert advice regarding legal and professional matters are categorized as operating expenses.
- Repair and Maintenance Expenses: Expenses incurred on the repair and maintenance of assets used for production or manufacturing purposes are treated as operating expenses.
- Insurance Expenses: Insurance expenses, including fire insurance for premises, medical insurance, and general insurance of staff, are also considered operating expenses as they help secure the business’s resources.
- Advertising Expenses: Advertising expenses incurred by the company for promotion and advertising activities aimed at increasing sales are charged under the head of advertising expense in the profit and loss account. This expense does not include trade discounts offered to customers for increased sales.
Conclusion
List of operating expenses comprises one of the most important aspects of the business i.e. operating expenses. Operating expenses are necessary for the smooth running of the business. A company’s management is always trying to reduce expenses and increase profit. But they should be careful while doing this because reducing operating expenses may result in a short-term increase in profit but can impact the company’s earnings in the long run.
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