Indirect expenses are those expenses that are used for the operation of a business and hence cannot be directly associated with a single product or service. These are not directly linked with a cost object which is any item for which the costs are being recorded and monitored separately. Some of the common examples of indirect expenses include rent, legal fees, auditing expenses, salaries or telephone and internet bills or the effort applied by the accountant in company creation in tally or while preparing income statements etc. Visit this page for more info.
They usually make up a small fraction of a company’s total expenses, but can add up to a significant amount over time.
Indirect expenses are common for companies with large operating costs, such as those in the manufacturing industry or service businesses such as restaurants and hotels. These companies often have high overheads and may struggle to keep up with rising costs, so it’s important to keep an eye on where their indirect expenses are coming from.
What are the different types of indirect taxes?
- Business and administration indirect expenses
Business and administration indirect expenses include the costs of office space, utilities, depreciation on equipment and vehicles used in business. The expenses are classified under business and administration because they are necessary for the day-to-day operation of a business and are not directly related to the production of goods or services..
Hence these are the costs that are incurred in running a business. These include salaries and wages, rent, utilities, office supplies and depreciation of fixed assets. These costs are usually excluded from the gross profit calculation because they do not contribute directly to a product’s manufacturing or sales costs.
- Sales and marketing indirect expenses
Sales and marketing indirect expenses include advertising fees, travel expenses, and salaries for sales staff and other service providers who work on behalf of the company. These expenses are not directly related to the production or sale of goods or services but have a bearing on future revenue generation. This is where you pay for advertising or promotion costs to promote your products or services. It also includes travel expenses if you have to travel to meet customers or potential clients.
- Economic indirect expenses
Economic indirect expenses are generally considered to be the largest category of indirect expenses, accounting for more than 50 per cent of total indirect costs. They include several types of items that are not specifically listed on the income statement, but they do represent a significant portion of an organization’s overall costs. Now let’s find out what is indirect expenses specifically of economic nature:
- Loan Interest
Loan interest is the interest charged on a loan by the lender to secure payment of the principal amount of the loan. The borrower pays this interest directly to the lender as well as reimburses him for any other expenses incurred on his behalf.
Audit refers to an examination of financial statements by independent external auditors to provide assurance that they are free from material misstatement and that they fairly reflect the financial position of their issuer (the company or organisation issuing them) in accordance with the standard accounting principles
This essentially refers to any payment that the company make to another entity over a period of time for various purposes. A common example of this is the payments and instalments made over the years for the acquisition of a property.
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