Operating Expenses: Operating expenses can be broadly classified into five categories - selling, administrative, depreciation and amortization, lease payments, and repairs and maintainence:
Selling Expenses - They relate to the expenses resulting from the company's effort to make sales including advertising, sales commission, sales supply and so on.
Administrative Expenses - These relate to the expenses of general administration of company's operations. They include salaries, insurance, telephone, bad debt expense and other costs difficult to allocate.
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Cash Discount: It is the amount of cash discount given to customers. It is a loss and is shown as an expense. The amount of cash discount received from creditors is an income and is shown on the credit side of the profit and loss account.
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Bad Debts and Bad Debts Recovered: The amount, which cannot be recovered from customers, is termed as bad debt. It is a loss and is shown under expenses. If the amount which was previously written off as bad debt, is received, it is treated as income.
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Lease Payments - Lease payments include the costs associated with operating rentals of leased facilities for retail outlets. A Lease can be either an operating lease or a finance lease. Operating lease is a conventional rental agreement with no ownership rights conferred on the lessee. If a lease agreement satisfies four conditions (transfer of ownership to lessee, contains a bargain purchase option, has a lease term of 75% or more of the leased property's economic life or has minimum lease payments with a present value of 90% or more of the property's fair value), it is called as finance lease. Each lease payment is apportioned partly to reduce the outstanding liability and partly to interest expense.
Depreciation and Amortization - The cost of assets, that will benefit a business enterprise for more than a year is allocated over the asset's service life rather than expensed in the year of purchase. The cost allocation procedure is determined by the nature of long-lived assets. Depreciation is used to allocate the cost of tangible fixed assets such as buildings, machinery, equipment, fixtures and fittings, and motor vehicles. Amortization is the process applied to the cost expiration of intangible assets such as patents, copyrights, trademarks, licenses, franchisees and goodwill. The cost of acquiring and developing natural resources like oil and gas, other minerals and standing timber is allocated through depletion.
Repairs and Maintenance - These are the costs of maintaining the firm's property, plant and equipment. Expenditures in this area should correspond to the level of investment in capital equipment and to the age and condition of the company's fixed assets.
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