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Home Expense Management

Expense Categories- What They Are and How Can They Help

Aishwarya Srivastava by Aishwarya Srivastava
January 14, 2023
in Expense Management
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expense categories

Table of Contents

  • What Are Expense Categories
  • Different Types of Expense Categories
  •  Cost of goods sold
  • Benefits of Categorising Expenses
  • Happay Simplifies Expense Management

Business expense management is a tough nut to crack for finance teams, especially if the organisation has many employees. Allotting expense categories to different spending enables structure and helps simplify the spending management process. 

Expense categories make the organisation, tracking and analysis of expenditures easier. They not only help finance officers make informed decisions but also save them a lot of trouble during the tax season. 

What Are Expense Categories

Expenses can be divided into broad categories like operating expenses, non-operating expenses, cost of goods sold etc., 

These categories may sometimes have overlapping subcategories. It is hence essential for finance officers to specify organisation-based expense categories and subcategories before starting the process of expense reporting. 

Different Types of Expense Categories

Operating expenses

Operating expenses are all the payments made to enable the organisation’s day-to-day operations. They are not related to the manufacturing and development of the final products. A few common categories of operating expenses are listed below. 

Here is a detailed guide on operating expenses.

  • Selling expenses

All the expenses that enable the final sale of the company’s offerings are selling expenses. They include advertising, promotions, event costs, content development, design, branding, public relations, distribution, marketing, salaries of sales professionals etc. 

Learn how to calculate selling expenses here.

  • Office expenses

These expenses enable the everyday operations of the organisation. Office rent, furniture costs, maintenance, utilities, office supplies and property taxes and other related expenditures are all office expenses. 

  • Travel expenses

All travel facilitating business operations or sales of the product or service are classified as operating expenses. This includes flight tickets, hotel reservations, meals, car rentals etc.

  • Compensation

The salaries and compensation of all the employees who do not directly participate in producing or delivering products or services come under operating expenses. 

  • Legal and professional fees

Professional fees include the cost of paying various professionals like financial planners, accountants, lawyers etc. All professional fees that cater to the benefit of the business are an operating expense.

Non-operating expenses

All costs that do not facilitate an organisation’s basic, day-to-day functioning are non-operating expenses. These expenses also do not include the cost of developing the product or delivering the services. They are usually non-recurring that may or may not affect the revenue. Some common non-operating expenses are-

  • Interest, debt and other expenses

Non-operating expenses include all interests paid on loans, corporate credit cards, ongoing credit lines etc. Any overdraft fee, insufficient funds fee, debt etc., are also non-operating expenses. 

  • Restructuring costs

Restructuring cost is a non-recurring one-off expense that an organisation incurs while restructuring its operations. Businesses may need restructuring after lay-offs while changing locations or production or closing manufacturing units or offices.   

  • Damages caused by disasters

All the losses incurred due to property damage caused by natural disasters are non-operating expenses. 

  • Inventory write-offs

When a portion of business inventory suffers damage, theft, becomes obsolete or loses value, it is written off and cannot be used to produce revenue. These write-offs cause losses to the business, categorised as non-operating expenses. 

  • Lawsuit settlements

Lawsuit settlements are the money businesses spend to pay a conflicting party to meet a legal obligation before or after court action. Unlike legal fees, lawsuit settlements are classified as non-operating expenses.

Expense categories- Happay
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 Cost of goods sold

Cost of Goods Sold or COGS is the total direct cost of producing or delivering goods. It relates to the revenue earned by the company. COGS is the expense category used to find the company’s gross profit. Here are the expenses.

  • Direct materials and labour costs

Manufacturing includes the costs incurred in the procurement of raw materials, equipment used to develop the products and wages of the employees directly involved with the production of the final product or the delivery of the services. 

  • Factory overhead

Factory overhead costs are the expenses that are related to manufacturing but are not directly related to the procurement of raw materials or labour. 

  • Packaging and storage and other costs

The costs of packaging the product and storing inventory are also classified as costs of goods sold. Other COGS includes freight-in costs, purchase returns and allowances, resale purchases, trade and cash discounts, etc.

Benefits of Categorising Expenses

  • Easier to set budgets

Categorising expenses refines business expense reports and provides clear insights into the spending and the return on investment for various categories. The finance team can consider this information before setting budgets and use it to optimise their resource allocation process.  

  • Easier to analyse spending habits

The best thing about categorising expenses is that it makes the analysis of employee spending activities easy. Expense categories help you learn how different departments manage their costs and which resources are underutilised and overspent. 

  • Tax deductions

Several expenses can qualify for tax deductions. Various expenses like interest on loans, debts, insurance costs, rent payments, and even travel costs are tax deductible in different capacities. These are just a few examples, and the list for tax-deduction eligible expenses is quite long. 

Recording, tracking and organising expenses according to specific categories helps you account for all the costs you can file as tax deductions.     

Happay Simplifies Expense Management

Happay offers end-to-end expense management solutions for businesses. It helps the finance officers control costs, automate expense policy compliance, fast-track reports and get real-time insights into purchases. 

 

Expense management has never been more hassle-free. Schedule a demo with the Happay team to learn more about the product. 

 

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Table of Contents

  • What Are Expense Categories
  • Different Types of Expense Categories
  •  Cost of goods sold
  • Benefits of Categorising Expenses
  • Happay Simplifies Expense Management

Related Articles

  • 10 Best Expense Management Software and Tools in 2023
  • 7 Best Zoho Expense Alternatives and Competitors
  • 10 Best Expense Reporting Software Systems and Tools in 2023
  • The Ultimate Guide to Travel and Expense Management…
  • Expense Management Automation: Process and Benefits
  • A Comprehensive Guide for Travel and Expense Policy (T&E…
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