Operating Expenses: Definition, Types, Examples, and Accounting Treatment

1. What Are Operating Expenses?

Operating expenses (OPEX) are the costs a business incurs through its regular business operations—excluding the direct costs of producing goods or services (which are recorded as Cost of Goods Sold, or COGS).

OPEX are essential for day-to-day functioning and include expenses like rent, utilities, salaries, office supplies, insurance, and marketing.

Why OPEX Matters:

• Directly impact net profit

• Key component in financial analysis and valuation

• Indicator of operational efficiency

2. Types of Operating Expenses

Operating expenses cover a wide range of costs. Common categories include...

• Salaries and Wages: Payroll for administrative and support staff.

• Rent and Lease Payments: Office/building space, equipment leases.

• Utilities: Electricity, water, internet, phone services.

• Office Supplies: Stationery, computers, minor equipment.

• Repairs and Maintenance: Upkeep for office, equipment, and technology.

• Insurance: General liability, property, health insurance.

• Advertising and Marketing: Promotional activities, digital ads.

• Legal and Professional Fees: Accountants, consultants, legal advisors.

• Travel and Entertainment: Business trips, client meetings.

• Depreciation and Amortization: Allocation of asset costs over time.

Note: OPEX do not include capital expenditures (CapEx), COGS, interest, or taxes.

3. Operating Expenses vs. Non-Operating Expenses

	Operating Expenses (OPEX)	Non-Operating Expenses
Definition	Day-to-day business running costs	Costs not related to core ops
Examples	Rent, salaries, utilities	Interest expense, asset write-down
Location in P&L	“Operating expenses” section	“Other expenses” section

Why Distinguish?

Investors and managers assess operational efficiency separately from non-operational activities for clearer performance analysis.

4. Accounting Treatment & Journal Entries

Operating expenses are recorded on the income statement in the period they are incurred, following the accrual basis of accounting.

Sample Journal Entries

1. Recording Rent Expense

   • When paid:

     • Debit: Rent Expense

     • Credit: Cash/Bank

2. Accrued Salaries

   • When salaries are owed but unpaid at month-end:

     • Debit: Salaries Expense

     • Credit: Salaries Payable

3. Prepaid Insurance

   • When insurance is paid in advance:

     • Debit: Prepaid Insurance (Asset)

     • Credit: Cash

   • As expense is recognized monthly:

     • Debit: Insurance Expense

     • Credit: Prepaid Insurance

Example:

• 1 June: Pay €12,000 for annual insurance (covering next 12 months).

• Entry at payment:

  • Debit: Prepaid Insurance €12,000

  • Credit: Bank €12,000

• Monthly recognition:

  • Debit: Insurance Expense €1,000

  • Credit: Prepaid Insurance €1,000

5. Operating Expense Ratios and Analysis

Operating Expense Ratio (OER):

Total Operating Expenses ÷ Total Revenue

• Lower OER: Indicates better cost control

• High OER: May signal inefficiency, or investment in growth

Other Key Ratios:

• SG&A as % of Sales: Selling, General & Admin Expenses / Revenue

• Operating Margin: (Operating Income ÷ Revenue) × 100

How to Analyze:

• Compare to industry peers

• Track year-over-year trends

• Watch for sudden spikes

6. Practical Examples

Example 1: Tech Startup – Monthly OPEX Breakdown

• Salaries: €20,000

• Rent: €5,000

• Utilities: €1,000

• Marketing: €3,000

• Insurance: €500

• Total OPEX: €29,500

Example 2:

Retail Store – Journal Entry for Utility Bill

• Received electricity bill €800 (not yet paid)

  • Debit: Utilities Expense €800

  • Credit: Utilities Payable €800

7. US GAAP and IFRS Guidance

US GAAP:

• ASC 720 “Other Expenses”

• Expenses recognized when incurred, matched with related revenue if possible (Matching Principle)

• Specific guidance for categories like advertising (ASC 720-35)

IFRS:

• IAS 1: Expenses classified by function (e.g., “administrative”, “selling”) or nature (e.g., “wages”, “rent”)

• IAS 38: Guidance for amortization and certain other expenses

• “Expense” recognized when a decrease in future economic benefit occurs (excluding distributions to owners)

8. FAQs about Operating Expenses

Q1: Are employee bonuses an operating expense?

Yes, unless directly tied to production (then part of COGS).

Q2: Is depreciation an operating expense?

Yes, for assets used in day-to-day operations.

Q3: What’s excluded from operating expenses?

Cost of Goods Sold, interest expense, income taxes, and extraordinary losses.

Q4: Can operating expenses be capitalized?

No, except for costs directly attributable to acquiring or producing a fixed asset (then recorded as CapEx).

Summary Table: Common Operating Expenses

Category	Typical Account Title	Example Journal Entry
Salaries & Wages	Salaries Expense	Dr Salaries Expense / Cr Bank
Rent	Rent Expense	Dr Rent Expense / Cr Bank
Utilities	Utilities Expense	Dr Utilities Expense / Cr Utilities Payable
Advertising & Marketing	Advertising Expense	Dr Advertising Expense / Cr Bank
Depreciation	Depreciation Expense	Dr Depreciation Expense / Cr Accum. Depreciation
Insurance	Insurance Expense	Dr Insurance Expense / Cr Prepaid Insurance

__________

FOLLOW US FOR MORE.

DATA STUDIOS

datastudios.org