General and Administrative Expenses Definition – what are general and administrative expenses?
Why is it important to understand administrative expenses?
If not accurately recorded and accounted for, administrative expenses can include a variety of costs and affect an organization’s overall profits. Consider these other reasons for tracking and understanding administrative expenses:
What are administrative expenses?
Costs incurred by a business through its operations that are not directly related to manufacturing, production, or sales are known as administrative expenses. These costs are sometimes referred to as “overhead,” as they are necessary for the operation of the entire organization, not just a specific team or department. Administrative costs can be of various types, including labor, supplies, and utilities.
Examples of administrative expenses
Although administrative costs may differ for businesses in different industries, you can frequently divide them into a few key categories:
Particularly for those employees who don’t work directly in product development, sales, or customer service, some labor costs are viewed as administrative expenses. For instance, executive level employee salaries and benefits, as well as those of human resources staff and financial professionals, are typically categorized as administrative expenses.
Administrative costs include building expenses like a mortgage, rent, and utilities. Mortgage or rent for the office are typically fixed costs, but utility costs for the building can change seasonally.
Administrative costs include things like copy paper, printer ink, pens, and other similar items. These can vary depending on the industry. For instance, a software company that works primarily on computers will likely have lower paper and pen supply costs than a school that uses computers for most of its work.
Although some insurance types may be classified differently depending on the specifics of the policy, administrative expenses are frequently included when paying for insurance for the company, building, company vehicles, or any other assets.
Since they benefit the entire company rather than just a particular department or team, IT expenses like computers, internet costs, and related software are typically categorized as administrative expenses.
Another typical type of administrative expense is cleaning, repairs to the heating and air conditioning system, and other general building maintenance procedures.
How to calculate administrative expenses
To calculate administrative expenses, follow these steps:
1. Review all expenses
Begin by listing all of your companys expenses. To make sure you don’t forget any costs, it’s frequently simpler to create a complete list of expenses, even those that aren’t classified as administrative costs.
2. Categorize costs
When you have a list of all of your company’s expenses, mark those that are administrative expenses. Make sure you have the correct amount for the period you are tracking next to each expense after you have identified every cost.
3. Consider infrequent purchases
Although recurring costs like building electricity and office supplies are typically simple to recall, occasionally you may make a single, one-time administrative purchase that you should factor into your overall calculation. Check your purchasing records to make sure you’ve recorded all pertinent costs, purchases, and expenses.
4. Add up the totals
Add all the individual administrative expenses together. Make sure each expense has the correct time period calculated. For instance, triple any recurring monthly expenses to account for each month’s payment when calculating administrative costs for the first quarter of the year rather than using the single expense
5. Find the sum
Your overall administrative expense amount is calculated as the total of all of your individual costs and expenses. This metric can be used for tax planning, budgeting, forecasting, and as a line item on your quarterly or annual income statement.
FAQs about administrative expenses
Review the following frequently asked questions and answers to learn more about administrative costs:
Are all administrative expenses tax deductible?
The majority of administrative costs, such as rent, salaries, utilities, and telephones, are tax deductible. However, some administrative expenses are not tax deductible. When determining taxation laws and regulations, you might want to consult a qualified accountant or tax attorney.
Are administrative expenses direct expenses?
Administrative costs are considered “indirect expenses,” not “direct expenses.” “Direct expenses, such as manufacturing, sales, and production costs, are directly related to how the business generates profits. Administrative costs are indirect costs because they support the organization as a whole rather than directly supporting the good or service the company provides.
What are the best ways to lower administrative expenses?
Since administrative costs don’t directly affect production or sales, which could have a negative impact on a company’s profitability, they are frequently the first place a company looks to cut costs overall. A few options for lowering administrative costs include:
What are administrative operating expenses?
- Executives wages and benefits.
- The depreciation on office fixtures and equipment.
- Legal counsel and accounting staff salaries.
- Office supplies.
Is rent expense an administrative expense?
The costs of operating a business are also known as selling, general, and administrative expenses (SG&A). These expenses consist of rent and utilities, marketing costs, computer equipment, and employee benefits.