Administrative Expenses: Definition and Example

What is included in administrative expenses?
  • Rent.
  • Utilities.
  • Insurance.
  • Executives wages and benefits.
  • The depreciation on office fixtures and equipment.
  • Legal counsel and accounting staff salaries.
  • Office supplies.

General and Administrative Expenses Definition – what are general and administrative expenses?

Why are administrative expenses important?

Administrative costs are crucial because they can demonstrate to a company how much money is spent on running their operations and how much money is left over for production, sales, and promotion. This can assist a business in keeping track of its costs and modifying its spending.

What are administrative expenses?

Administrative costs are recurring expenses that are unrelated to any one department, the creation, development, or research of a good or service. Regardless of how many products a company sells, the majority of administrative costs include things that a business must pay for in order to operate.

Common administrative expenses

Here are some common administrative expenses:

Rent

Rent is one of the most typical administrative costs that businesses have. A business may use offices, workspaces, warehouses, and other locations to conduct business operations. All of these locations typically involve a rental agreement that permits the use of the space for a set fee each month.

Utilities

Another typical administrative cost is utilities, particularly for companies that lease space for an office or other facility. There are various utility cost types, and the majority of them include payments for services like electricity, water, heating and cooling, and trash removal. Some landlords may include utilities in a company’s rent, but even in these instances, the company will typically have to pay for one or two utilities separately.

Office equipment and supplies

Office equipment and office supplies are also common administrative expenses. Office furniture includes things like desks, chairs, computers, and phones that a business needs to carry out its daily operations. Anything from pens and notebooks to coffee cups and printer ink can be considered an office supply.

Insurance policies

The money that businesses spend on insurance for their operations and personnel is another typical administrative cost. Most businesses have insurance that safeguards the welfare of their employees in unexpected situations, despite the fact that the specific policies that a company buys can vary depending on the industry, employee job duties, and place of employment. Many businesses also decide to invest in general liability insurance or business insurance, which can protect them from lawsuits, property damage, and lost revenue.

Employee salaries and benefits

Employee salaries and benefits are considered administrative expenses. Even though a business might provide various benefits to workers with various salaries, they are all considered administrative costs.

Legal counsel

Many companies employ an in-house legal team to handle their legal proceedings and provide advice because conducting business may require adhering to legal requirements and industry regulations. Additionally, a business may keep a list of particular attorneys and retain them as needed. Legal counsel can ensure that a business complies with all required industry regulations.

Administrative expense example

Here is an illustration of how to identify which costs are administrative costs:

At the end of the fiscal year, an office supply company is preparing its income statement. The business spent $18,000 on product materials last year, $700,000 on employee salaries and benefits, and $50,000 on new manufacturing machinery. Additionally, the business spends $60,000 annually on rent and utilities for its office space.

The company adds $760,000 to its income sheet’s expenses to cover the money it paid in wages, benefits, and employee rent and utility costs. These are the companys administrative expenses.

The $68,000 the business spent on supplies and gear went toward manufacturing, so it does not classify these costs as administrative.

FAQs about administration expenses

Here are some responses to common queries about administrative costs:

Is depreciation expense an administrative expense?

Depreciation can be an administrative expense in some cases. However, depending on the assets that are depreciating, an organization may classify it as a selling expense. If a business, for instance, thinks about the depreciation of the chairs that workers use at work, it can categorize that depreciation expense as an administrative expense because the chairs have no bearing on production costs.

When are administrative expenses recorded?

Accountants typically keep track of administrative costs as they arise during the accounting period. This can sometimes mean that the period in which you incur an expense and the period in which you report it are different. For instance, a company may classify an expense as an administrative expense for the second fiscal quarter if it buys office equipment in the second fiscal quarter and pays it off in the third.

What is SG&A?

SG&A refers to selling, general and administrative expenses. The cost of materials or the cost of manufacturing equipment are examples of costs that go into selling and general expenses. They may also be costs associated with sales and promotion.

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