Expenses

A cost incurred by a company to generate revenue.

A cost incurred by a company to generate revenue is known as an expense.

Salaries paid to employees, advertising costs, tax costs, insurance, water and electricity, stationery, fuel, and other items, activities, or assets classified as necessary for running your business are examples.

All costs incurred by a company during a given accounting period are treated as costs and recorded in an income statement. The Profit & Loss, or (P&L) Statement, is another name for an income statement.

To assess your company's financial performance, you should have a basic understanding of the three main financial statements.

Let's take a closer look at the various types of it that a company can incur now that we know what they are. Small businesses are essential to the UK economy. Small to medium-sized businesses account for 99.9% of the 5.7 million businesses in the UK.

Each year, approximately 50,000 SMEs fail due to cash flow problems. This is due in part to difficulties obtaining resources and in part to cash-flow issues. Someone's costs are one of the most important parts of the cash flow equation.

A business's ability to manage costs is critical to its survival. It enables anyone to save enough money, pay the correct level of tax, and improve someone's company's financial health.

You will learn what costs are, which business costs you can claim, and how to claim them in this guide. To claim a business cost, you must have an accurate and auditable record.

This record serves as proof that these were accumulated during a specific time frame and are thus eligible for reimbursement.

The next step is to add all the allowable for the tax year and record the total on your Self Assessment tax return, which is how HMRC collects income tax.

A company doesn't have to provide evidence to HMRC unless they specifically request it. This is why it is important to keep accurate records when filing your taxes.

What are the various types of expenditures?

Operating expense (OPEX)

These are the costs that a company incurs in its day-to-day operations.

(OPEX) are recurring, short-term costs that are frequently repaid in the same accounting period as they are incurred. The length of an accounting period is usually the same as the financial year of your company.

It is divided into two categories:

1) Expenses for selling, general, and administrative purposes (SG&A)

2) Cost of Goods Sold (COGs)

(SG&A) costs include anything that is not directly related to the costs of producing the products that someone's company sells. Paying rent or utility bills are examples of (SG&A).

Conversely, (COGs) are directly related to the cost of producing a company's goods or services. For example, the materials a company uses to sell coffee, such as cups or lids, would be included in his (COGs).

Both (OPEX) and (COGs) are included in the income or P&L statement but are shown as separate line items.

(OPEX) under (SG&A) 

SG&A (Selling, General, and Administrative Expense) (OPEX) is typically associated with a company's overheads.

Here are some examples of (SG&A) operating expenses:

Utilities

  • These are costs associated with paying your utility bills.

  • Water, gas, and electricity are examples of it incurred by your business daily.

Office supplies

These costs are incurred to buy office supplies such as stationery, tables, chairs, and printing supplies.

Telephones

These are incurred by someone's company when using landlines or mobile phones. These bills are typically paid at the end of each month.

Traveling

  • These are incurred by someone or his staff while traveling for official visits, meetings, and other related purposes.

  • These may be infrequent, but when they occur, they must be recorded as traveling on the income statement.

Legal fees

These are the costs of using any type of legal service.

Insurance costs

These are the costs of purchasing general insurance, healthcare insurance, or fire insurance for someone's employees.

Advertising costs

  • These are associated with the promotion and advertising of someone's brand or its products.

  • Advertising is classified as OPEX because it is incurred with the intent of increasing sales or revenue.

Bank fees

These include any fees or other amounts charged by a bank for transactions conducted by someone's company. Charges for cheque processing, for example.

OPEX under COGs

COGS (Cost of Goods Sold) and OPEX include all costs directly associated with the production of goods or services sold by someone's business during a specific time.

COGs include the following OPEX:

Freight charges

This is the shipping cost that the buyer must pay at the time of purchase. Any freight-in is accounted for as part of the merchandise cost.

If the merchandise has not yet been sold, it should be counted as part of the inventory.

Freight charges

This includes the cost of merchandise transportation. It is related to the transfer of goods from the supplier to the customer.

Rental

This is the cost of using rented property or machinery to assist with production-related functions and operations.

Product prices

This is the cost of producing a single unit of a product for sale to customers. This includes direct labor, direct overhead, and direct material costs.

Depreciation costs

  • Depreciation is the loss of an asset's value due to wear and tear.

  • This may or may not be applicable depending on the items used during production.

Expenses of non-operating 

These are incurred by a company but are unrelated to the core business operations.

Non-operating expenses are shown on the income statement after OPEX and are deducted from the operating profit.

Here are some examples of business non-operating expenses:

1) Interest costs

  • The cost of borrowing money is represented by the interest expense. It is the fee that a lender charges a business for using the lender's funds.

  • This category of expense could include the cost of bank loans, bonds, convertible debt, and other borrowed funds.

2) Asset disposition loss

  • This expense is incurred when someone's company deletes an asset from its accounting records.

  • The gain or loss on asset disposal is calculated as the net disposal proceeds minus the asset's carrying value.

Asset disposition loss

3) Outdated inventory charges

  • These costs are associated with inventory that has reached the end of its product life cycle. This inventory has not been sold or unused for an extended period and is unlikely to be sold soon.

  • Because it is essentially dead weight, this type of inventory can cause significant losses for a company.

4) Suit settlement costs

  • These are the costs associated with settling lawsuits.

  • Non-operating expenses are those that are not directly related to a company's core operations.

5) Costs of restructuring

  • This is the cost of reorganizing business operations to improve overall efficiency and long-term profit.

  • Both operating and non-operating expenses are generally recorded on an accrual basis. 

  • Accrual basis is a method of recording accounting transactions in which costs are matched with revenues reported for a specific accounting period rather than the period in which you pay for these expenses. 

Expenses of capital

A company's capital expense (CAPEX) is the money it spends to maintain or improve its fixed assets.

CAPEX includes the cost of purchasing new machinery, vehicles, buildings, land, or any other major asset for a business.

CAPEX consists of the following:

  • Buildings

  • Equipment for computers

  • Equipment for the office

  • Fixtures and furniture

  • Land

  • Machinery

  • Vehicles

  • The software

Expenses are also classified according to whether they are fixed or variable.

Fixed such as rent or mortgage payments are payments over which businesses have little control because they represent a legal obligation to pay. Variables are payments over which businesses have complete control.

This expense varies depending on whether a company chooses to reduce or increase its production or any other activity. Variables include transaction fees and commissions. 

Variable costs, unlike fixed costs, are proportional to the cost of producing goods or services. The cost of goods sold (COGS) refers to variable expenses, whereas fixed costs are not normally included in COGS. 

If sales commissions are factored into per-unit manufacturing costs, fluctuations in sales and production levels might impact variable costs. Meanwhile, even if output slows dramatically, fixed expenditures must be paid.

What expenses can a company deduct?

Any expense that can be beneficial to a company can be deducted. This is because most businesses' expenses are deducted from their income before VAT, and other taxes are applied.

This is also known as tax relief because it allows the business to reduce the amount of tax that it must pay. You must keep an accurate and auditable record of it for up to six years to claim them.

Here are some business expenses that can be deducted:

  • Compensation: Salaries, wages, bonuses, pensions, commissions, and other forms of compensation provided to full-time employees, independent contractors, consultants, and freelancers are all tax-deductible.

  • Office costs: Rent, utilities, phone bills, supplies, and other items used for less than two years can be claimed as a business expense.

  • Travel: Some transportation, such as gas, parking, train, or bus tickets, are tax-deductible. Traveling to and from work is not tax-deductible.

  • Clothing: Money spent on business-related clothing, such as uniforms and safety equipment, can be deducted as a business expense.

  • Raw materials: Items purchased for resales, such as stock or raw materials, are tax-deductible.

  • Training courses: you can deduct the cost of training your employees or offering courses related to your business.

  • Marketing and advertising include domain registration, hosting fees, photographs, brochures, flyers, and other advertising and marketing costs.

  • Insurance: Financials such as insurance and bank fees are tax-deductible.

  • Food: Official meals with clients or employee lunches while on official business travel are 50% deductible.

  • HMRC allows anyone to claim £150 per employee per year for entertainment purposes, but there is no allowable expense claim if someone is a sole trader.

The costs someone can deduct are also determined by the type of business you run. If someone is a sole proprietor, his list of tax deductibles may differ from that of a limited company.

Personal Allowance in the United Kingdom is £12,570 for the fiscal year 2021-2022. This means you can deduct up to this amount from your tax payments. Some of it, on the other hand, is not tax-deductible.

Here are some examples of business expenses that cannot be claimed:

1) Penalties: Failure to file taxes on time or make bill payments on time can result in penalties that cannot be claimed as a business expense.

2) Political contributions: If someone's company has made any contributions to a political party, you cannot deduct these contributions.

3) Personal hobby: Personal hobbies are not an allowable business.

What are total expenses, and how do you track them?

They are the sum of a company's costs for running the business. 

Salaries, web hosting fees, software subscriptions, hardware repairs, transportation, advertising fees, and equipment purchases, for example, are all expected costs of running a SaaS company.

It is defined as how much a company spends before net income and can be used as a metric to compare spending habits over time.

It is also the sum of all gross cash expenditures plus any pending subsidiary items such as (OPEX), incentive fees, interest, and taxes paid in a given period.

A company's income statement may show significant total revenues. As you work your way down the income statement, begin subtracting the following line items to arrive at EBIT (earnings before interest and taxes):

  • Price of goods sold

  • Depreciation

  • Development and research

  • Costs of selling and marketing

  • Administration and general

  • Other charges

Once you've reached EBIT, subtract interest and taxes to arrive at net income, also known as "the bottom line."

Company costs can be tracked in two ways. A regularity or frequency-based rating is one, while a type-based rating is another.

Frequency-based tracking of expenses

Because it's predictable, accountants classify them by frequency or regularity. What better way to predict future spending than to look at previous spending?

  • Standard charges that occur on a predetermined date and for a predetermined amount during the financial year are referred to as fixed. These costs include things like internet and rent.

  • Even though they are not standard in value or time, recurring costs are fairly consistent costs on your balance sheet. Office supplies, business lunches, and dinners are among them.

  • Non-recurring expenses are difficult to predict. Unplanned system maintenance or excess phone charges are examples of unavoidable.

  • Extraordinary costs refer to costs associated with disaster scenarios such as flooding, uninsured lawsuits, and medical emergencies.

  • Keeping track by frequency can help someone uncover hidden costs like a software subscription anyone forgot to cancel. It also enables anyone to keep separate expense accounts to help with budgeting and forecasting.

Keeping track of expenses by category

The type of business expense is the second way to categorize it:

→ Marketing and sales (M&S)

Two sources exist for your M&S expenses: 

1) Personnel in marketing and sales (i.e., payroll)

2) Others are attributed to M&S.

The income statement can only reflect zero costs if both of these components are zero. 

Here are several difficulties that might result in no M&S staff costs:

  • Some people don't have any M&S workers. On this page, look at the Salary Charged To column entries. They have no M&S expenditures since they have no workers whose salaries are charged to marketing and sales.

  • Someone has M&S employees, but they are paid nothing. Make certain that the Initial Base Salary column for the M&S workers mentioned contains non-zero values.

  • Someone has an M&S employee category, but no count. Make sure that the Employee Count columns for these M&S workers have non-zero values.

  • Someone has M&S workers and a base wage but does not intend to pay them. If that is his intention, this is also okay. It would be recorded on the Advanced Settings page for each M&S employee as a Percentage Paid of 0%.

  • Someone has M&S workers with a basic wage who are not working. This is illogical. Check that the Percent Time Worked field on the Advanced Settings page for each M&S employee is not set to 0%.

  • Someone has M&S workers with a base wage, but their time is charged to COGS rather than M&S. This is also permissible if that is his intention, but it is unusual (if not illegal) for marketing and sales professionals! It would be represented on the

  • Advanced Settings tab for each M&S employee as a Percent COGS vs. expenditure of 100 percent.

→ Administration and general (A&G)

A&G expenditures are incurred in the day-to-day operations of a business and are not always directly related to a single function or department inside the organization. General expenditures are operational overhead costs that affect the entire firm. 

Administrative costs are those that are not directly related to a certain function inside the organization, such as manufacturing, production, or sales. Rent, utilities, insurance, legal costs, and some wages are examples of A&G.

→  Development and Research (D&R)

D&R costs are directly related to the research and development of a company's goods or services and any intellectual property developed in the process. 

D&R expenditures are often incurred by a corporation in the process of discovering and developing new goods or services.

This classification's primary goal is to determine how a company distributes its spending and compare those ratios to competitors.

For example, a data management firm might use this method to discover that they spend twice as much on marketing as their competitors but only half as much on research and development.

How to calculate the total expenses?

It is critical to understand the distinction between revenue and income before calculating the total. Before deducting the costs, revenue is the amount of money earned after selling products or services.

Income is defined as total profits (net income) after the costs are deducted from revenue. The formula for calculating the total from revenue, owner's equity, and income are as follows:

Net income = End equity - Opening equity (from the balance sheet)

Total = Net Revenue - Net Income

If the outcome is positive, the revenue exceeds the costs, resulting in a profit. If the number is negative, the company loses money because its costs exceed total revenue.

Example 1

The equity of a company increases from $200,000 to $800,000. It has a total revenue of $1,200,000. The total costs are:

Net income = 800,000 - 200,000 = $600,000

Total (EXB) = 1,000,000 - 600,000 = $400,000

The difficulty arises when other factors have an impact on the owner's equity section. These are some examples:

  • A gain or a loss

  • dividend payments to shareholders in the form of cash dividends

  • Raising new equity capital through the issuance of shares or the purchase of treasury stock

Example 2

A company's total revenue was $800,000. It also had the following information on its balance sheet in the equity section: equity increased from $750,000 to $1.2 million, paid $50,000 in cash dividends, and issued $150,000 in shares.

Determine its total 

Net income = [1,200,000 (the ending equity) + 50,000 (dividends paid)] - [750,000 (starting equity) + 150,000 (shares issued)] = $350,000

Total = 800,000 - 350,000 = $450,000

The formula above is useful for calculating a company's total.

A detailed breakdown of costs throughout the accounting period, on the other hand, is an invaluable management tool for tracking and cutting costs, informing budget decisions, and supporting project growth.

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Researched and authored by Fatemah Kamali | LinkedIn

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