Depending on the financial statement format, the costs might be categorized in different subcategories like selling and general administrative. All of these costs are reported on the income statement at the end of an accounting period. Some common examples of costs are employee salaries, advertising, rent, utilities, taxes, and supplies. As the expense account increases, the total equity of the company decreases. You can see this clearly in the expanded accounting equation where equity = owner’s capital – withdrawals + revenues – expenses. This only makes sense since expenses lower the net income or profits of the company. This means that equity is decreased as the company generates more expenses. The expense account is a contra equity account that has a debit balance. Expenses are created when an asset is used up, not when cash is paid out. Notice that I didn’t say it’s the amount of money spent to generate sales. In other words, an expense is the use of assets to create sales. Reducing the bottom line of costs may affect the good name of the store while a small increase in prices may be understandable if the quality of goods in store stay the same.Definition: An expense is the cost of an asset used by a company in its operations to produce revenues. With there being a limit on the cutting of operating costs before feeling a negative effect, the store may consider trying to increase revenue as an alternative. The store may lose business as a result and sometimes the loss may outstrip the initial savings of reducing the payroll bill. A downside to this is that there will be less people selling, delays in helping customers or even a need to increase security with fewer eyes on the store sales area. The storeowner will also have to consider how to reduce the operating costs of the store without impacting directly on the smooth running of the business.Ī storeowner may look to reduce operating costs by cutting down on payroll, say cutting sales staff from five to four, with the direct result of substantial reduction in salary costs. The storeowner must also budget for when a store closes over holidays or in the event of an emergency such as a fire or flood. Managing Operating Costs of a BusinessĪll operating costs will need paying, regardless of whether the store is open or closed. Many people consider them as costs to the store before even opening the doors and indicate the minimum income the store will need to generate in becoming a viable business. Operating costs may add up to a hefty total and the storeowner should consider all operating expenses before going into business. There may be more such expenses depending on the nature of the store’s business. Employee benefits such as health insurance.The store keeps an account of their operating expenses and the list may include such items as: How do Operating Expenses Work in a Business?Ī business, for example a grocery store, incurs operating expenses distinct from those involved in the primary activity of the store, which is selling groceries. They are the expense of carrying on the day- to-day activities that do not involve production or sales. Operating expenses are the costs to a firm of activities not connected directly with the primary activity of the business.
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