Operating expenses are expenses incurred by a business in carrying out daily activities. Operating expenses consist of things such as payroll, rent, utilities, repairs and taxes. Manufacturing costs are not included in operating expenses. Companies prepare income statements at the end of each period that typically separate operating expenses from other expenses such as manufacturing expenses. An income statement shows a company's revenues, expenses and profits. To calculate operating expenses for an income statement, the company's general ledger accounting records are needed.
Gather the general ledger accounting records. The general ledger is a book used for recording all financial transactions occurring within a business. The ledger lists all the accounts used by a company and are listed in a specific order. The ledger lists assets first, then liabilities, equity accounts, revenues and expenses. The ledger also contains a running balance for each account.
Find the expense section in the ledger. The expenses are all listed last in the general ledger. Expense accounts are considered nominal accounts. This means they are temporary accounts and are used for tracking amounts spent in each category. These accounts begin the year with a zero balance, and entries are made into the accounts all year. At the end of the year, a company can see how much was spent in each category.
Investigate the expense accounts listed. Normal income statements contain five different categories into which expenses are broken. Cost of goods sold is an expense relating to the production of goods and services. Financial revenues and expenses are an expense relating to investments, and extraordinary items are expenses from unusual transactions. The other two categories of expenses are operating expenses from selling and operating expenses from general and administration.
Determine which accounts are considered operating expense accounts. Any expense relating to the firm's day-to-day operations are considered operating expenses. To calculate the firm's operating expenses, all payroll accounts should be listed. These include commissions, employee benefits, pension contributions and travel reimbursements. Other expenses to include in operating expenses are depreciation expenses, rent, repairs, utilities, taxes, software contracts and advertising costs.
Add all operating expenses. Each expense that fits into these categories is written down and added up. This gives a total of how much the company spent on expenses relating to the operations of the business.
Things you need
- General ledger accounting records