A financial statement consists of different types of expenses on income statement. The income statement shows how the revenue generated from the sale of products and services is transformed into the net income, after taking out all the expenses.
It consists of revenues received in specific period, and various expenses charged for these revenues. Income statement is mainly used for the purpose of showing the managers and investors whether the organization managed to make profits or incurred loss during the financial period.
Basic rules of accounting are applied to categorize the accounts for all businesses in identical manner. Categories of income and expenses may also include company-specific differences apart from using common titles for accounts. However, there are three basic expense categories which are considered to be common to most of the businesses.
Cost of Goods Sold
Any business which is into manufacturing products consists of a category for cost of goods sold. This account typically contains inventory valuations of both beginning and ending, freight and shipment of products, debts accumulated due to poor sales and non-payment, and other expenses that are associated with the products sold by the company. Some of the companies also include compensation related expenses that are associated with the items made and/or sold.
Operating expenses usually accounts to the highest expense category, which identifies all regular costs related to the day-to-day requirements of the organization. Primary accounting rules in this category state, the inclusion of benefits, compensation, payroll taxes of local, state, and federal areas, office expenses, travel, advertising, supplies, postage, repairs and maintenance, rent or mortgage of facilities, utilities like electricity, air conditioning and telephone and payments made to accountants and attorneys.
Non-Operating expenses include all other costs and expenses which do not fall under the category of operations in the organization. This category often includes corporate income taxes. After determining the net profit, companies identify the state and corporate income taxes for the financial year. Income taxes are generally not computed until the accounting period for the operations has been closed.
Employee and Officer Expense Accounts
Employee and officer expense accounts are generally not stated in the profit and loss statement. This category of accounts is designed to classify the amount of expenditure of the employees, management team, board of directors for assessing their performance. One important component which falls under the category of employee and offer expenses is travel and lodging. The entire sum of different forms of travel and lodging will be placed in the travel account on the income statement.
Expenses that are acknowledged in the income statement should be determined either by nature or by function. Raw materials, transportation costs, resources, staffing costs, equipment costs, depreciation, etc. can be classified as expenses by their nature. Cost of sales, marketing, administrative costs, etc can be classified as expenses due to functionality.