- Expenses are costs incurred in the ordinary course of doing business. Expenses can be categorized as one of the following:
- Cost of Goods Sold
- Operating Expenses
- Non-operating expenses
Cost of goods sold is the cost of buying or making a product to be sold. Cost of goods sold is calculated using the following formula:
- Beginning Balance of Inventory
- Plus: Purchases made during the period
- Goods available for sale
- Less: Ending inventory balance
Operating expenses include the cost of doing business and are categorized as selling expense and general and administrative expenses. Selling expenses include the costs your company incurs to sell or distribute its product, such as advertising and marketing costs, sales commission, and freight costs. General and Administrative expenses are costs your company incurs that are not directly related to the sale of products such as salaries, rent expense, and utility payments.
Non-operating expenses are passive costs your company incurs, such as interest expense.
Losses occur when your company sells a fixed asset or investment for a value less than its book value. A loss is recorded for the difference between the sales price and the book value of the fixed asset or investment sold during the ordinary course of business. Using the example used for to describe recording a gain, we can say your company decided to sell a company car with a book value (book value equals the asset's purchase price less accumulated depreciation) of $20,000 for $15,000 cash, a loss of $5,000 is realized.
We prepare a multi-step income statement for clients but do offer a more basic format at the request of clients. The multi-step income statement separates revenue and expenses by category. Cost of Goods sold is subtracted from Sales to compute gross profit for the period.Gross Profit
- Gross profit is revenue directly tied to the sale of goods and services before adjustments are made for operating and non-operating income and expenses. Next, operating expenses and operating income are subtracted from gross profit to calculate operating income. Non-operating items are then added and subtracted from operating income to figure your company's net income.
- If you purchase a truck for your company, the purchase is initially recorded by debiting the fixed asset account (i.e., truck) and crediting cash (or accounts payable if paid for on account).
Cash (or Accounts Payable) $30,000
A monthly entry to record depreciation expense is also required. Depreciation expense is calculated by determining the useful life (number of years you expect to use the asset) and the salvage value of the asset at the time it is expected to be retired (not used by your company any longer). The salvage value is the amount you expect to receive for the asset (the truck) at the time of retirement. The salvage value may be $0 or higher if you plan to sell the car to a third party.
Using the truck example, let's say you expect to use the truck for 7 years and the truck's salvage value to be $8,000 because you are planning to sell it to a used car dealership after the seven years. If you paid $22,000 for the truck your monthly depreciation would be $2,000 per month. Depreciation is calculated as follows:
Purchase price - salvage value
The trucks book value is calculated by subtracting accumulated depreciation (sum of all depreciation expense) from the purchase price. At the end of the fourth year, the book value of the truck in the above example would be $14,000:
Purchase Price $22,000
Less: Accumulated Depreciation $8,000 = ($2,000 * 4 years)
Truck's book value $16,000