Definition
Operating Expense (OpEx): Operating expenses are the ongoing costs incurred in the operation and maintenance of a property or business. These expenses include actions like paying property taxes, utilities, salaries, repairs, and hazard insurance. Unlike capital expenditures, which are related to acquiring, maintaining, or improving fixed assets, operating expenses are necessary to keep the asset or business running operationally. Operating expenses do not include financing expenses (such as interest payments), depreciation, or income taxes.
Examples
- Property Taxes: Regular payments that are typically made annually to local government authorities, based on the assessed value of the property.
- Utilities: Monthly or quarterly payments for essential utilities such as water, electricity, and gas that are necessary for the day-to-day running of a property.
- Hazard Insurance: Insurance premiums paid to protect the property against damages from events such as fire, storms, or vandalism.
- Salaries and Wages: Compensation provided to employees who help in maintaining the property or running the business.
- Maintenance and Repairs: Cost incurred for the regular upkeep and repairs necessary to maintain the functionality or appearance of the property.
Frequently Asked Questions
1. What are operating expenses in accounting?
Operating expenses in accounting refer to all the costs a company incurs to run its day-to-day operations. These expenses include costs for rent, utilities, payroll, maintenance, insurance, and other expenses necessary for ongoing operations.
2. Are salaries considered operating expenses?
Yes, salaries and wages paid to employees are considered operating expenses as they are necessary costs for running day-to-day operations in a business or maintaining a property.
3. What is excluded from operating expenses?
Operating expenses do not include financing expenses (such as interest payments on loans), depreciation, and income taxes.
4. How do operating expenses affect net income?
Operating expenses directly affect net income by being deducted from gross income. Higher operating expenses will decrease net income, while lower operating expenses will increase net income.
5. Why is the distinction between operating and non-operating expenses important?
The distinction is important for assessing a company’s efficiency and operational effectiveness. Operating expenses relate to the core activities of the business, while non-operating expenses are peripheral or unrelated to primary operations.
Related Terms
- Capital Expenditures (CapEx): The funds used by a company to acquire or upgrade physical assets such as buildings or equipment.
- Gross Income: The total revenue generated by a company before operating expenses and other costs are deducted.
- Net Income: The profit of a company after all expenses, including operating and non-operating costs, are subtracted from total revenue.
- Depreciation: The systematic reduction of the recorded cost of a fixed asset, such as property or equipment, over its useful life.
- Operating Margin: A profitability ratio that shows what percentage of revenue is left over after paying for variable costs of production.
Online References
Suggested Books for Further Studies
- “Financial Accounting” by Robert S. Kemp and Jeffrey W. Flynn
- “Accounting Made Simple: Accounting Explained in 100 Pages or Less” by Mike Piper
- “Essentials of Accounting” by Leslie K. Breitner and Robert N. Anthony
- “Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield
Fundamentals of Operating Expense: Business Management Basics Quiz
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