46 Operating expenses and accounts payable
Please refer to Exhibit 7.1 at the start of the chapter, which high-
lights the connection between selling, general, and administra-
tive expenses in the income statement and the second of the two
accounts payable components in the balance sheet. Recall from
Chapter 6 the two sources of accounts payable — from inven-
tory purchases on credit, and from expenses not paid immedi-
ately. Chapter 6 explains the connection between inventory and
accounts payable. This chapter explains how expenses drive the
accounts payable liability of a business.
Every business in the world has a wide variety of operating
expenses. The term “ operating ” does not include cost of goods
sold, interest, and income tax expenses. Also, in our example, the
company ’ s depreciation expense is reported separately. All other
operating expenses are combined into one conglomerate account
labeled “ Selling, General, and Administrative Expenses ” (see the
income statement in Exhibit 7.1 ). This expense title is widely
used by businesses, although you see variations of this title.
Day in and day out, many operating expenses are recorded
when they are paid, at which time an expense account is
increased and the cash account is decreased. But some operating
expenses have to be recorded before they are paid — which is the
focus of this chapter.
“ Operating expenses ” is the convenient term I use in the col-
lective sense to refer to many different speciﬁ c expenses of run-
ning (operating) a business enterprise. In this business example,
the annual depreciation expense on the company ’ s long - lived,
ﬁ xed assets is shown as a separate expense. So, the $ 12,480,000
total of selling, general, and administrative expenses does not
include depreciation. (It would if the depreciation expense were
not reported separately.) And, to remind you, the $ 12,480,000
total for operating expenses does not include cost of goods sold,
interest, and income tax expenses, which are reported separately
in the income statement (see Exhibit 7.1 ).
Operating expenses include the following speciﬁ c expenses (in
no particular order):
Rental of buildings, copiers, computers, telephone system
equipment, and other assets.
Wages, salaries, commissions, bonuses, and other compensa-
tion paid to managers, ofﬁ ce staff, salespersons, warehouse
workers, security guards, and other employees. (Compensation
of production employees is included in the cost of goods man-
ufactured and becomes part of inventory cost.)
Payroll taxes and fringe beneﬁ t costs of labor, such as health and
medical plan contributions and the cost of employee retirement
plans (a very difﬁ cult cost to measure for deﬁ ned beneﬁ t plans).
Ofﬁ ce and data processing supplies.
Telephone, fax, Internet, and web site costs.
Inventory shrinkage due to shoplifting and employee theft or
careless handling and storage of products; the cost of goods
Recording Expenses Before They Are Paid
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