Direct and Indirect Expenses

True Tamplin

Written by True Tamplin, BSc, CEPF®
Updated on September 20, 2021

Expenses

An expense is a cost that has been incurred in the process of earning income and revenue. In simple words, the costs of doing business are called 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:

  1. Direct expenses
  2. Indirect or operating expenses

Direct 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.

Example

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.

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:

  1. Office and administrative expenses
  2. Marketing, selling, and distribution expenses
  3. Financial and other expenses

List of Direct Expenses

Purchases Carriage Carriage In
Carriage Inward Carriage on Purchases Transportation Inward
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 Materials:
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 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
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
True Tamplin, BSc, CEPF®

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.

To learn more about True, visit his personal website, view his author profile on Amazon, his interview on CBS, or check out his speaker profile on the CFA Institute website.

2 thoughts on “Direct and Indirect Expenses”

    • Thanks! Let us know what other kinds of information you’d like to see and we’ll try to add it in the future. Best of luck!

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