What is operating expenses

The term "operating expenses" is most often used in corporate finance. They, as a rule, designate those costs that arise from doing business periodically.

Operating expenses are the costs associated with the management of the organization, as well as its activities for the sale of manufactured (supplied) products. Simply put, this is the cost of doing business.

Types of operating expenses

The most common item of such expenses is the payroll, sometimes having the largest amount in the total expenses of the organization. Other articles, which may also be included in the list of operating expenses, include advertising and marketing expenses, expenses for office supplies, utilities, expenses for the purchase of raw materials, payment of licenses and legal services, and expenses for research activities.

Depreciation, which reflects a decrease in the value of fixed assets over a period of time, should also be attributed to operating expenses. In the case, for example, if vehicles or production equipment wear out over time and their residual value becomes lower than the original, the difference is written off as amortization. This item is considered operating expenses if the assets are used by the organization in operating activities.

The difference between operating expenses and capital

It is also important to note that the one-time costs associated with doing business tend to relate to capital expenditures. For example, it may be the purchase of new equipment when the old equipment is already fully depreciated.

Capital and operating expenses are shared mainly due to the fact that company management and potential investors can thus receive more detailed information about where the money will be spent before the profit is made.