How to Read Expense Accounts for Financial Reporting
Any costs on the financial statements not directly related to generating revenue are considered expenses. Expenses fall into four categories: operating, interest, depreciation or amortization, and taxes. A large company can have hundreds of expense accounts, so here is a broad overview of the types of expense accounts that fall into each of these categories:
Operating expenses: The largest share of expense accounts falls under the umbrella of operating expenses, which include advertising, dues and subscriptions, equipment rental, store rental, insurance, legal and accounting fees, meals, entertainment, salaries, office expenses, postage, repairs and maintenance, supplies, travel, telephone, utilities, vehicle expenses, and just about anything else that goes into the cost of operating a business and isn’t directly related to selling a company’s products.
Interest expenses: Interest paid on a company’s debt is reflected in the accounts for interest expenses — credit cards, loans, bonds, or any other type of debt the company may carry.
Depreciation and amortization expenses: The process for amortization is similar. The depreciation and amortization accounts track the amount written off each year for any type of asset, and the income statement shows expenses related to depreciation and amortization in each individual year.
Taxes: A company pays numerous types of taxes. Sales taxes aren’t listed in the expense area because they’re paid by customers and accrued as a liability until paid. Taxes withheld from employee paychecks are also accrued as a liability and aren’t listed as an expense.
The types of taxes that are expenses for a company include the employer’s half of Social Security and Medicare taxes, unemployment taxes and other related payroll taxes that vary depending on state, and corporate taxes, if the company has incorporated. Businesses that aren’t incorporated don’t have to pay taxes on income. Instead, the owners report that income on their personal tax returns.