Direct and Indirect Expenses
Examples of expenses include routine expenses such as purchases, salaries, commissions, and utility bills.
Expenses that appear in the trial balance are one of the following two kinds:
- Direct expenses
- Indirect or operating expenses
Direct expenses are any expenses incurred to manufacture or purchase goods and to bring them into saleable condition. Direct expenses become part of the cost of the goods manufactured or purchased.
Direct expenses can be thought of as any costs other than materials and wages. They are incurred for a specific product, and if they were not incurred, the production of that specific product would not be possible.
Consider the example of royalties paid to a book author. An author’s effort is not direct material nor direct labor, yet it is essential for producing the book.
Similarly, a company may acquire the rights to manufacture a product whose patent or trademark rights are held by another company. They may agree to pay a small fee or royalty to use the trademark or formula for production.
In real-world accounting practice, there are very few items that are classified as direct expenses. Generally, the heading Direct Expenses is ignored in the preparation of accounting statements.
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
|Carriage Inward||Carriage on Purchases||Transportation Inward|
|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. Lubricating Oil
3. Cotton Waste
2. Cotton Seeds
3. Oil Seeds
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 outward||Freight Outward||Delivery Expenses|
|Advertisement||Warehouse 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|
|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|
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True contributes to his own finance dictionary, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.