Operating expenses are the costs associated with a company's main operating activities and which are reported on its income statement.

For example, a retailer's main operating activities are the buying and selling of merchandise or goods. Therefore, its operating expenses will include:

  • Cost of goods sold. These costs are reported as operating expenses on the income statement because of the matching principle. The revenues from the sale of merchandise must be matched with the cost of the merchandise that is sold.

  • Selling, general and administrative expenses (SG&A). These costs are reported as operating expenses on the income statement because they pertain to operating the main business during that accounting period. These costs may have expired, may have been used up, or may not have a future value that can be measured.

Some authors define operating expenses as only SG&A. In other words, they do not include the cost of goods sold as an operating expense. Such a definition will be deficient for calculating a company's operating income. Clearly, the calculation of operating income cannot omit the cost of goods sold.

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