So, we’ve covered a LOT in the past week. And, we even did a smidge of algebra along the way. We obviously ROCK!
On to Expenses. Quite simply, as the title of this post says: Expenses are the stuff we have to pay for. They are the rent/mortgage, the gas and electric bill, the telephone bill, the internet bill, payroll, insurance, blah blah blah, you get the picture.
Now, in the world of financial statements, there are two kinds of expenses:
1. Cost of Goods Sold: what you pay for the things you end up selling.
2. Operating Expenses: Everything else you pay for.
Cost of Goods Sold
Let’s start with Cost of Goods Sold (COGS). Well, it is what it says it is: The price you have to pay for what you bought that you’re going to sell. Or, the COST of the GOODS you’re going to SELL. Now, this isn’t only “things”, this could also be what you pay some of the people on your payroll.
Here’s the key: if you have to incur the cost in order to sell your “product”, then it’s probably a Cost of Goods Sold. Another hint would be if the total aggregate cost of what you’re buying goes up in direct proportion to your Revenue. For a more in-depth discussion, stay tuned. I’ll be talking about this more tomorrow!
Everything Else!
Okay, if it’s not a COGS, then it’s “everything else”. The rest of your Expenses are commonly referred to as “Operating Expenses”. That is, they are expenses that aren’t directly related to selling your product, but are expenses that you incur. I.e., the rest of the bills you have to pay!
Operating Expenses can be broken down even more, if you WANT, into:
-General & Administrative Expenses
-Sales & Marketing Expenses
-Interest Expense (I’ll explain why this one is broken out later. Kinda complicated, but nothing we can’t handle. ☺)
-Any other broad category you deem necessary to run your business and get the information you need out of your financial statements. (Which, hey, is the Whole Point!) For example, I work with a software company who needs to have a category called Engineering Expenses. It’s whatever you feel you need to track, in a broad sense.
Whew! And there you have Expenses. If you’ve got a business, heck if you just have a household, you’ve got expenses and you need to keep track of them. Remember: these are just “buckets” to track how much you’ve spent on what. That’s it. Nothing magical or scary or confusing.
Because, let’s face it, have you ever seen a magical, scary accountant? I didn’t think so. ☺
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