How Selling, General, and Administrative Expenses Are Classified in the Income Statement.
- Graziano Stefanelli
- Sep 19
- 3 min read
Selling, general, and administrative expenses (SG&A) are a major category of operating expenses in the income statement. They represent the indirect costs incurred in running a business that are not directly tied to producing goods or delivering services. SG&A provides insight into how efficiently a company manages its overhead and support functions, and it is often one of the largest expense categories for companies outside of cost of goods sold. Proper classification and reporting of SG&A ensure comparability across companies and help investors assess whether operating margins are sustainable.
SG&A includes the indirect costs of running the business.
While cost of goods sold captures direct production costs, SG&A encompasses the expenses necessary to operate the business as a whole. These include:
Selling expenses: Salaries and commissions of sales staff, marketing campaigns, advertising, promotional materials, and distribution costs.
General expenses: Rent, utilities, insurance, and office supplies.
Administrative expenses: Salaries of executives, accounting and legal fees, information technology, and human resources costs.
By grouping these costs, the income statement distinguishes between direct production activities and broader business support.
Presentation in the income statement emphasizes operating performance.
SG&A is reported under operating expenses, below gross profit and above operating income. Companies may choose to disclose SG&A as a single line item or break it down into detailed subcategories depending on their reporting practices.
For example:
This structure makes clear how much of gross profit is consumed by overhead before financing costs and taxes are considered.
Journal entries show recognition of SG&A costs.
SG&A expenses are recorded as they are incurred. For example:
Debit: Advertising Expense 5,000
Credit: Cash 5,000
Debit: Salaries Expense 20,000
Credit: Salaries Payable 20,000
At the end of the period, these expenses are closed to the income summary, reducing net income. Unlike capital expenditures, SG&A items are expensed immediately, reflecting their role in the current period’s operations rather than creating future benefits.
Standards provide guidance on classification.
Both IFRS and US GAAP require companies to classify expenses in a way that reflects the nature of operations and provides useful information to users of financial statements. Entities may present expenses either by function (cost of sales, distribution, administration) or by nature (raw materials, salaries, depreciation). SG&A is typically part of a functional presentation.
For example, a software company that emphasizes a functional format may present SG&A as a single consolidated line, while a manufacturing firm may provide a detailed breakdown to highlight cost control initiatives.
SG&A analysis highlights efficiency and profitability.
Investors and analysts examine SG&A as a percentage of revenue to assess how efficiently overhead is managed. A rising SG&A ratio may indicate inefficiencies, higher fixed costs, or increased spending on marketing and administration without corresponding revenue growth. Conversely, a declining SG&A ratio signals improved scalability and cost discipline.
For example, if SG&A is 100,000 and revenue is 500,000, the SG&A-to-sales ratio is 20 percent. If this ratio increases to 30 percent in future periods without a clear growth strategy, investors may question management effectiveness.
Disclosures provide clarity on the nature of SG&A.
Companies are encouraged to disclose significant components of SG&A to improve transparency. Disclosures may highlight major categories such as advertising expenses, executive compensation, or professional fees. IFRS further requires disclosure of expenses recognized by nature when presenting by function, ensuring consistency across industries.
These disclosures allow stakeholders to identify which areas of overhead are consuming the most resources and to evaluate whether cost structures align with industry norms.
SG&A plays a decisive role in determining operating income.
Because SG&A sits between gross profit and operating income, it has a direct impact on a company’s ability to generate profit from core operations. Efficient management of SG&A expenses strengthens operating margins and signals disciplined cost control. Poor management, however, may erode profitability even when gross profit is strong.
SG&A therefore represents more than an accounting category: it is a reflection of how effectively management balances the pursuit of growth, marketing, and administrative support with the need for profitability and shareholder returns.
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