Direct and Indirect Expenses
Expenses are amounts paid for goods or services purchased. They can either be directly or indirectly related to the core business operations. The kind and stage at which it is incurred in the business determines if it is a direct or an indirect expense, e.g. overheads, rent, light, salaries, wages, sales, etc.
Direct and Indirect expenses are defined as follows:
Direct, as the word suggests, are those expenses which are completely related or assigned to the core business operations. They are mainly related to purchases and production of goods/services. Direct expenses are a part of the prime cost or the cost of goods/services sold by a company.
Direct expenses can differ for different types of companies, such as manufacturing companies, construction companies, service companies, etc.
Direct expenses are shown on the debit side of a trading account.
Wages, Factory rent, Material Cost, Premises Renting, Fuel, Freight, Carriage Inwards etc.
Unlike direct, indirect expenses are not directly related or assigned to the core business operations. Indirect expenses are necessary to keep the business up and running, but they can’t be directly related to the cost of the core revenue generating goods/services.
Indirect expenses can be different for different types of companies such as manufacturing, construction, service companies etc.
Indirect expenses are shown on the debit side of an income statement.
Salaries, Telephone bills, Printing & Stationery, Legal & Accounting charges, Carriage Outwards etc.
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