Definition of Operating Expenses
Operating expenses are the costs that have been used up (expired) as part of a company's main operating activities during the period shown in the heading of its income statement.
Examples of Operating Activities
Examples of a retailer's main operating activities involve the buying and selling of merchandise or goods. Therefore, the retailer's income statement will report the following operating expenses:
- Cost of goods sold. These costs are reported as operating expenses on the income statement because of the matching principle: The cost of the merchandise that is sold is being matched with the revenues from selling the goods.
- 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 are expenses because they 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 when measuring a company's operating income. Clearly, the calculation of operating income cannot omit the cost of goods sold.