All businesses, no matter what their size, have to pay very close attention to their outgoing funds if they are to generate accurate financial reports. Outgoing funds are typically known as expenses and are calculated by an accountant or virtual accountant using data provided by the company. Here is a quick guide to the kinds of expenses that businesses need to account for.
Taxes
In the United States of America, all businesses are responsible for the filing of their own tax reports. Most businesses consider the money that they hand over in taxes to be a kind of operational expense. A good accountant, like Michael Savage in New Canaan, can help reduce the amount of excess tax that a company pays by investigating the exact nature of incomings, outgoing and deductible exchanges that a company has been involved in.
American companies pay tax on imports, exports, income, sales and more. A good accountant is needed to accurately tot up all of the expenditure involved in the payment of tax.
Cost Of Goods Sold (COGS)
Cost of Goods Sold – usually referred to as COGS – refers to the direct costs associated with producing and selling a product. In other words, it represents the expenses incurred to produce the products that a company sells to its customers. COGS is a crucial metric for businesses, especially those that manufacture or sell physical goods, as it directly impacts the bottom line.
COGS typically includes direct materials such as raw materials, direct labor costs such as wages and benefits paid to workers who produce the product, and factory overhead expenses such as utilities, maintenance, and depreciation of manufacturing equipment. It is important to note that COGS does not include indirect expenses such as marketing, sales, and administrative costs, which are included in operating expenses.
To calculate COGS, businesses must keep accurate records of the costs associated with producing their products. This information is then used to determine the gross profit, which is calculated by subtracting COGS from revenue. Gross profit provides a picture of the profitability of a company before considering indirect expenses.
Cost Of Goods Sold is a crucial metric for businesses that produce and sell physical goods. It provides valuable insight into the direct costs associated with production, which helps companies make informed decisions about pricing, production processes, and product development. By understanding and managing COGS, businesses can improve their bottom line and increase their overall profitability.
Operating Expenses
These expenses are necessary for the business to function and include a wide range of items, such as salaries and wages, rent, utilities, supplies, insurance, and marketing and advertising costs. Operating expenses are considered to be the cost of doing business and are a key component of a company’s income statement.
Understanding operating expenses is important for a number of reasons. Firstly, it helps a business determine its cost structure and determine how much it needs to sell in order to cover these costs. Additionally, tracking operating expenses helps a business identify areas where it may be able to reduce costs and increase efficiency.
By analyzing operating expenses, a business can make good decisions about where to allocate resources and how to improve its financial performance. Operating expenses are a key component of a company’s financial statements and are used to calculate various financial ratios, such as profit margins, which help investors and lenders assess the finances of a company.
Depreciation And Amortization
Depreciation and amortization are accounting concepts used to spread the cost of long-term assets over the expected useful life of those assets. These concepts are used to allocate the cost of an asset over the period of time that the asset is expected to generate revenue for a business.
Depreciation is the process of allocating the cost of a tangible asset, such as a building or equipment, over the asset’s useful life. The idea behind depreciation is that the cost of an asset decreases over time as it becomes less valuable and less useful to the business. Depreciation is used to match the expense of an asset to the revenue generated by that asset.
Amortization is similar to depreciation, but it is used to allocate the cost of intangible assets, such as patents, copyrights, and trademarks. Unlike tangible assets, intangible assets do not have a physical form, but they still provide economic benefits to a business over time. Copyrights, for instance, can bring financial benefits to a company by allowing it to monetize its copyrighted content and protect its intellectual property. By having a copyright on a product, such as a software program or a book, a company can license the use of that product to others for a fee. This can provide a steady stream of income for the company and help it increase its revenue.
Businesses need to take depreciation and amortization into account because it affects their financial statements, including the income statement and balance sheet. Depreciation and amortization expenses reduce taxable income, which can result in lower tax liabilities. A good accountant will always advise clients on ways in which they can reduce their tax liability – within the bounds of the law. Additionally, these expenses help provide a more accurate picture of a company’s financial performance, since they reflect the true cost of the assets being used to generate revenue.
Interest Expense
Interest expenses are the costs that a business incurs as a result of borrowing money. When a company takes out a loan or issues bonds, it must pay back the principal amount plus interest. Interest is a fee charged by the lender for the use of their funds and is usually expressed as a percentage of the loan amount.
Businesses need to account for interest expenses for a number of reasons. Firstly, it helps the company understand the cost of borrowing and how it impacts their financial performance. By keeping track of interest expenses, a company can make informed decisions about when to borrow, how much to borrow, and from whom to borrow.
Additionally, accounting for interest expenses is important for tax purposes. Interest expenses are tax-deductible, meaning that they can be subtracted from the business’s taxable income, reducing the amount of tax owed. Finally, interest expenses are a key component of a company’s financial statements and are used to calculate various financial ratios, such as debt-to-equity ratio, which help investors and lenders assess the financial health of the company.
Non-Operating Expenses
Some of the expenses mentioned previously in this article could be considered non-operating expenses. Any money spent by a company that does not have anything to do with the day-to-day operations of said company can be counted as non-operating. Interest expense and losses on the sale of assets are, for instance, both non-operating expenses. It is important to separate operating and non-operating expenses when creating a financial report.
Separating operating and non-operating expenses in accounting is important because it helps to provide a clearer picture of a company’s financial performance. Operating expenses are directly related to the core operations of a business, while non-operating expenses are not.
By separating these two types of expenses, it allows for a clearer understanding of the true costs associated with a company’s primary operations and provides a better basis for evaluating the efficiency and profitability of the business. Additionally, separating operating and non-operating expenses helps to identify areas where cost-cutting measures can be taken, without affecting the core operations of the business.
