Categories of Business Expenses

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  • 0:04 Statements of Income
  • 0:39 Cost of Sales
  • 1:14 Rent or Mortgage Payment
  • 1:38 Utilities & Compensation
  • 2:51 Insurance & Taxes
  • 4:03 Lesson Summary
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Lesson Transcript
Instructor: Tammy Galloway

Tammy teaches business courses at the post-secondary and secondary level and has a master's of business administration in finance.

In this lesson, we'll define business expenses and learn the major categories they're comprised of. We'll also explain the difference between rent and mortgage payments, and what type of wages are considered expenses.

Statements of Income

Jeanne is a junior at the University of Scholars. She's excited to enroll in the first course of her accounting major. Her professor, Mr. Keeland, starts the class by introducing the income statement. The income statement represents revenue, expenses, and earnings. Revenue comes from sales, and earnings are calculated by subtracting expenses from revenue. Expenses are the costs related to producing revenue. Examples include cost of sales, rent or mortgage payments, utilities, wages, insurance, and taxes. Let's take a look at each category.

Cost of Sales

Cost of sales are the cost of purchasing or manufacturing the actual products that are sold. Cost of sales are also listed as the Costs of Goods Sold, or COGS. Professor Keeland states cost of sales typically are the largest expense on the income statement. An example of the cost of sales for a clothing retailer would be the cost of the clothing. They purchase the clothing from a wholesaler and sell it at a price above their costs. Let's assume the wholesaler manufactured the clothing, so their cost of sales would include the sewing equipment, the fabric, buttons, zippers, etc.

Rent or Mortgage Payments

The next category is rent. Rental payments occur when the company doesn't own the property it occupies. In Professor Keeland's class, a student raises his hand and asks the difference between rent payments and mortgage payments. The professor states that mortgage payments differ in that they are made toward the ownership of a building. Mortgage and rental payments are both expenses and listed on the income statement.

Utilities & Compensation

Professor Keeland asks the students to partner up and determine the type of utility expenses incurred by a business. The students come up with electricity, gas, water, Internet, and phone. The professor mentions that utilities can be variable or fixed expenses. Variable expenses change monthly, while fixed expenses remain the same. Examples of variable utilities are electricity, gas, and water; while Internet and phone are categorized as fixed expenses.

The next expense projected on the classroom screen is compensation. Compensation is paid by an employer to an employee and includes wages, salaries, bonuses, and commission. It's important to note the terms 'wages' and 'salaries' are used synonymously. A student asks if there's a distinction in reporting salary versus hourly employees. The professor explains that hourly employees are paid based on the number of hours they work, while a salaried employee can work any number of hours, less or more than 40 hours per week and their compensation will remain the same. However, there isn't a requirement to separately report both on the income statement.

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