1. Direct Expenses (Meaning & Definition)
   1. Examples
   2. Direct Expenses List (with PDF)
   3. Are Direct Expenses Operating Expenses?
   4. Direct Expenses in Trading Account
   5. Direct Expenses in Service Industry
2. Indirect Expenses (Meaning & Definition)
   1. Examples
   2. Indirect Expenses List (with PDF)
   3. Are Indirect Expenses and Overheads the same?
   4. Indirect Expenses in Final Accounts
   5. Is Salary a Direct or Indirect Expense?
3. Direct Expenses Vs Indirect Expenses (Table Format)
4. Quiz
5. Conclusion

Expenses are amounts paid for goods or services purchased. They can either be directly or indirectly related to the core business operations. The type of expense and timing at which it is incurred by the business frames the key points of difference between direct and indirect expenses.

Meaning & Definition of Direct Expenses

“Direct”, as the word suggests, are those expenses directly related and assigned to the primary business operations of a business. In general, they relate to the purchase and production of goods and services.

They are expenses associated with purchasing goods and delivering them to a business location.

Such expenses are a part of the prime cost or the cost of goods/services sold by a company. They are also called direct costs and are directly related to the production of the main revenue-generating product or service.

They may differ for different types of companies, such as manufacturing companies, construction companies, technology companies, etc.

Real-life Examples

• Imagine that you own a restaurant. The money spent on ingredients, rent of the restaurant, the chef’s salary, utility bills, etc., are all direct expenses.
• Imagine that you are a retailer. The money spent on buying products wholesale, travelling expenses to the wholesaler, fuel and gas, etc., will be the direct costs.
• Suppose you own a salon. In this case, no product is sold since it is a business in the service industry. Money spent on shampoos, combs, dyes, conditioners, etc., would be directly attributable to costs.

Examples of Direct Expenses

• Wages
• Factory rent
• Cost of raw material
• Premises renting
• Carriage inwards
• Fuel, etc.

Related Topic – Capex and Opex (Capital Expenditure & Operating Expenditure)

Direct Expenses List (with PDF)

The main logic to categorising any expense as direct is to ask yourself, “is the cost directly linked and attributable to the primary income-generating product of the company?”. If the answer is “Yes”, then it is most likely a direct expense.

Our team researched and compiled a list of the most commonly seen direct expenses.

General

1. Wages
2. Freight Inwards
3. Manufacturing Expenses
4. Factory Lighting
5. Factory Rent
6. Factory Insurance
7. Gas, Water and Fuel
8. Cargo Expenses
9. Import Duty
10. Shipping Expenses
11. Dock Dues
12. Octroi
13. Motive Power
14. Clearing Charges
15. Custom Charges
16. Coal, Oil, and Grease
17. Overhaul of Machinery
18. Repairs of Machinery
19. Upkeep and Maintenance
20. Loading and Unloading

Service Industry

In the service industry, some commonly seen direct expenses are:

1. Salaries to professionals who provide the services.
2. Amounts paid to other freelancers and part-timers.
3. Other costs of rendering services, e.g. Fuel & Gas, etc.

Construction Industry

In the construction industry, some commonly seen direct expenses are:

1. Construction Material costs
2. Labour costs
3. Equipment
4. Subcontracting fees

PDF Download – List of Direct Expenses

Related Topic – Is Depreciation an Operating Expense?

Are Direct Expenses Operating Expenses?

Direct expenses are not the same as operating expenses

Why?

Operating expenses are also known as operating costs, operating expenditures, etc. It is the cost that a business must incur on a day-to-day basis to function properly. Examples: Utility bills, marketing, office supplies, office rent, etc.

On the other hand, direct expenses are those that are incurred in order to manufacture or produce products/services that are then sold in the market to generate income. Examples: Factory rent, factory power, wages, etc.

Note the difference between the words “factory” and “office”.

• In a factory, costs incurred are directly related to the production of the product or service (direct expense).
• An office refers to a workplace that deals mainly with selling and administrative activities (operating expenses or indirect expenses)

Related Topic – Difference Between Loss and Expense

Direct Expenses in Trading Account

This heading will answer a frequently asked question related to the topic “where are direct expenses shown or entered?”

Direct expenses are shown on the debit side of a trading account because costs related to the production, procurement, buying and selling of goods/services should appear in this account.

This is where the initial gross profit or gross loss is determined.

Related Topic – What are Sundry Expenses?

Direct Expenses in the Service Industry

Intellectual skills, knowledge, expertise, and experience are among the few intangible items a business sells when running operating in the service industry. It does not involve a physical product. Examples: Accounting services, IT consulting, Hospitality, Payroll, Cleaning Business, etc.

Some service industry players need inventory, while others do not. Direct material costs consist of the parts and supplies you use, e.g. a cleaning company would use cleaning supplies, mops, brooms, etc. For such companies, these are direct expenses along with any other necessary costs associated with the action of providing services.

On the other hand, personal service companies such as an accounting firm (e.g. KPMG) may not require to spend anything as direct material costs. For such service,

• A professional’s salary.
• Money paid to freelancers & employees who work part-time.
• Expenses directly associated with rendering services.

Cost of Services

Direct and Indirect costs can be declared on the income statement as expenditures since a personal service company does not hold inventory.

You can also use an independent “Cost of Sales A/c” to list the expenses on the profit and loss account. As an independent line item, each expense is reported separately.

Related Topic – Expense is Debit or Credit?

Meaning of Indirect Expenses

Unlike direct, indirect expenses are not directly related and assigned to the core business operations of a firm. They are also known as Opex or operating expenses.

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 products or services.

Just like direct expenses, indirect expenses can also be different for diverse organisations. These are usually shared costs among different departments/segments within the firm.

Examples of Indirect Expenses

• Salaries
• Telephone bills
• Printing & Stationery
• Legal & Accounting charges
• Carriage outwards

Related Topic – Profit and Loss Suspense Account

Indirect Expenses List (with PDF)

The main logic to categorising any expense as indirect is to ask yourself, “is the cost directly linked and attributable to the primary income-generating product of the company?”. If the answer is “No”, then it is most likely an indirect expense.

Our team researched and compiled a list of the most commonly seen indirect expenses.

1. Office Rent, Rates & Taxes
2. Salaries
3. Legal Charges
4. Audit Fees
5. Advertisement Expenses
6. Commission Paid
7. Discount Allowed
8. Depreciation
9. Bank Charges
10. Printing & Stationery
11. Travelling Expenses
12. Salesmen Salaries
13. Warehouse Insurance
14. Delivery Van Expenses
15. Packing Charges
16. Carriage Outwards
17. Premises Rent (office-related)
18. Brokerage Charges
19. Postage & Cartage
20. Selling Expenses
21. Telephone Expenses
22. Interest Payments
23. Sundry Expenses
24. Bad Debts
25. Repairs & Renewals

PDF Download – List of Indirect Expenses

Are Indirect Expenses and Overheads the same?

As per Wikipedia, overhead or overhead expense “refers to an ongoing expense of operating a business. Overheads are the expenditure which cannot be conveniently traced to or identified with any particular revenue unit”.

Overhead expenses are crucial for business operations, but it is nearly impossible to directly associate them with products or services sold by the firm. They do not play a direct role in generating profits.

Yes, overheads and indirect expenses are mostly similar. However, some overhead costs (exceptions) can be directly related to a product, so a part of such costs may be direct.

For a deeper understanding of this topic, we recommend reading these two concepts on Wikipedia. Overhead Expense & Indirect Costs.

Indirect Expenses in Final Accounts

This heading will answer a frequently asked question related to the topic “where are indirect expenses shown or entered?”

Indirect expenses are shown on the debit side of an income statement this is because costs which are not directly related to the production, procurement, buying and selling of goods/services should appear in this account.

It is here that the net profit and net loss are determined.

Related Topic – Paid Telephone Bill Journal Entry

Is Salary a Direct or Indirect Expense?

Employers pay salaries to their employees as compensation for the work they perform. If the salary expense can not be directly related to the production of products/services being offered by the company, then it is an indirect expense.

In most cases, salary is an indirect expense shown in the profit & loss account.

Another question asked often is, “Why are wages direct but salaries indirect expense?”

Wages, on the other hand, are payments made for a specific period of time. In the modern scenario, this can be related to freelancers and part-time workers.

Traditionally wages have always been categorized as direct expenses as it is assumed that they are related to the compensation made to the factory workers who help produce the primary selling item for the company.

In contrast, it is presumed that the money paid to other employees (not factory workers) is called salaries. This logic leads to wages becoming direct expenses, as opposed to salary expenses becoming indirect expenses.

Although the situation may be different in today’s world, direct and indirect expenses should be handled according to their respective rules regardless of the expense.

Related Topic – Journal Entry for Salary Due

Direct Vs Indirect Expenses in a Table Format

Related Topic – Meaning of Write-off or Expense-off

Short Quiz for Self-Evaluation

Conclusion

To understand and study direct expenses, it is important to study the company’s Trading Account. All the trading activities are recorded here. Therefore, it is the primary source for obtaining data related to the company’s essential buying and selling.

To understand and study indirect expenses, it is important to study the company’s Income Statement. All the operating activities of a company are recorded here. Therefore, it is the primary source of information for anything unrelated to the core revenue generation activities.

There is a clear difference between direct and indirect expenses. Other similar terms are:

1. Fixed cost
2. Variable cost
3. Operating cost
4. Non-operating costs
5. COGS
6. Extraordinary Expense
7. Capital Expenditure, etc.

However, they may all be different when you deep-dive and understand them thoroughly.

>Related Long Quiz for Practice Quiz 23 – Direct and Indirect Expenses

>Read Receipt Vs Income Vs Payment Vs Expenditure

1. Meaning and Overview
2. Examples
3. Outstanding Expenses Journal Entry
   1. Journal entry for outstanding rent
   2. Journal entry for outstanding salary
   3. Journal entry for outstanding wages
   4. Journal entry for outstanding commission
4. Outstanding Expenses are Asset or Liability?
5. Where do Outstanding Expenses Appear?
6. Outstanding Expenses in Trial Balance?
7. Outstanding Expense is Which Type of Account?
8. Treatment in Final Accounts
9. Revision Video
   1. Quiz
10. Conclusion

Meaning and Overview

Outstanding expenses are those expenses which have been incurred during the current accounting period and are due to be paid, however, the payment is not made. Such an item is to be treated as payable by the business.

Examples – Outstanding salary, outstanding rent, outstanding subscription, outstanding wages, etc. Outstanding expenses are recorded in books of finance at the end of an accounting period to show the true numbers of a business. They are also casually known as expenses due but not paid, unpaid expenses, arrears, overdue expenses, etc.

Expenses are the amounts paid for goods or services purchased. The accrual concept of accounting records transactions in the books of accounts when they occur regardless of when the money is received or paid.

It is not always possible to make and receive payments immediately, they may be late or in advance. Outstanding expenses, prepaid expenses, accrued income & income received in advance are all a result of held-up payments and receipts.

Related Topic – Expense is Debit or Credit?

Examples

Company-A has a rent obligation of 10,000/month that is due every 10th of the month. On Dec 10th, the company failed to make this payment.

The amount not paid by Company-A on 10th Dec is termed as “Outstanding Rent” in the current year (a classic example of an outstanding expense).

At the end of the period, this “expense due but not paid” impacts the financials of the business. As per accrual accounting, it is supposed to be journalized.

Related Topic – Is Depreciation an Operating Expense?

Outstanding Expenses Journal Entry

In the event that a business fails to make a payment when it is due it becomes an outstanding expense and is treated as a liability.

Journal Entry for Outstanding Expense

(Being expense not paid on the due date)

Related Topic – What is Adjusted Trial Balance?

Journal Entry for Outstanding Rent

Rent is a periodic payment made to cover the cost of occupying and using a property (land, building, etc.). The payments are made to the owner of the property. It is often paid monthly, or yearly.

In the context of outstanding rent, it refers to rent due for a period that has already passed.

Outstanding rent journal entry should be recorded as follows:

At the time when rent is due and not paid.

(Being unpaid rent recorded)

Journal Entry for Outstanding Salary

Paying employees a salary is a way for employers to compensate them for their work. Most of the time, it is paid monthly and includes some benefits.

It is called an outstanding salary when a payment is due to be made to an employee but he or she has already worked for that period.

Outstanding salary journal entry should be recorded as follows:

At the time when salary is due but not paid.

(Being unpaid salaries recorded)

Journal Entry for Outstanding Wages

There is a slight difference between wages and salaries. It is common practice to refer to part-time jobs, jobs with variable hours, and jobs with repetitive duties as wages instead of salaries.

Usually, wages are paid weekly, bi-weekly, or monthly. The most common difference between salary and wages is that salaries are fixed amounts, but wages are determined by the number of hours an employee works.

Outstanding wages journal entry should be recorded as follows:

At the time when wages are due but not paid.

(Being unpaid wages recorded)

Journal Entry for Outstanding Commission

Commissions are designed to provide incentives and rewards to salespeople for promoting certain products, sales behaviour, or for simply increasing the sold quantities.

A commission payable in the current year that remains unpaid till the end of the year is an outstanding commission.

Outstanding commission payable journal entry should be recorded as follows:

At the time when a commission is owed but not paid.

(Being unpaid commission recorded)

Related Topic – Journal Entry for Commission Received

Outstanding Expenses are Assets or Liability?

The term “liabilities” refers to money owed by companies or individuals. Money, goods, or services may be used in exchange to pay off liabilities over time. An expense that is unpaid after it is due is considered outstanding and it is treated as a liability (current) for the business.

Reason – The logic of why payment due for an expense is treated as a liability by the business is because the benefit in exchange for the payment is already received. It stays a liability till the time the actual expense owed is paid. It is the obligation and responsibility of the business to pay them off.

Such an expense has an expired value which means the benefit in exchange for the payment is expired.

Why is it considered a current liability?

Liabilities that are generally expected to be settled within the current accounting year (usually 12 months) are called current liabilities.

The expectation around an outstanding expense is to convert it from being a liability to realising it as an expense within a year.

It is typical for current liabilities to be settled with current assets such as cash. In this way, they contribute to the calculation of the current ratio and cash ratio.

Related Topic – Why is Income Received in Advance Treated as Current Liability?

Where do Outstanding Expenses Appear?

Outstanding expenses in balance sheet are viewed as a liability and shown on the balance sheet under the head “Current Liabilities”. Such entries help provide accurate accounting information to both internal and external users of accounting information as well as compliance with accounting laws.

It is shown as a current liability until it is fully paid, after which it is removed from the balance sheet and no longer shown.

• Expense not paid is an obligation for the business that shows up on the balance sheet to ensure liabilities are not understated.
• It is shown as a current liability because the assumption is that the delayed payment will be settled within one accounting year.

Outstanding Expenses in Trial Balance

If outstanding expenses appear inside the trial balance

In such a scenario it implies that the adjusting entry has already been posted. In this case, it is only shown in the balance sheet as a “current liability” and no adjustment is required in the income statement.

For example, if outstanding wages are shown in the trial balance, they will be recorded on the liabilities section of the Balance Sheet (only). Accounts that appear in the trial balance are only shown in one place in the final accounts/financial statements.

If outstanding expenses appear outside the trial balance

In case it appears outside the trial balance then it is considered an adjustment in the final accounts and adjusted both in the income statement and the balance sheet. (two adjustments)

Trading & Income Statement – Show as an addition to respective indirect expense

Balance Sheet – Show under “Current Liabilities” on the balance sheet

Related Topic – List of Debit and Credit Items in Trial Balance

Outstanding Expenses is Which Type of Account?

The outstanding expense is a personal account and is treated as a liability for the business. It is also shown on the liability side of a balance sheet.

Due to its indirect link to a person or group, it makes sense to call it a representative personal account. As per the rules of debit and credit, it follows the rule of Dr. the receiver and Cr. the giver.

However, as per modern accounting rules, it is a liability and follows the rule of Cr. the increase and Dr. the decrease.

Treatment in Final Accounts

Treatment of Outstanding Expenses in Financial Statements/Final Accounts

• Trading & Profit and Loss A/c  Show on the Dr. side (add to respective direct or indirect expense)
• Balance Sheet: Show on the “Liabilities” side (under the head “Current Liabilities”)

Example

In the year, a company paid Rs 10,000 in salaries and estimated the outstanding salaries to be Rs 2,000. Adjust outstanding expenses in final accounts at the end of the period.

Revision and Highlights

Highly Recommended!!

Do not miss our 1-minute revision video and the quiz below. This will help you quickly revise and memorize the topic forever. Try them :)

Short Quiz for Self-Evaluation

Conclusion

A similar concept is accrued expense, which can be used interchangeably but it differs slightly from outstanding expense. Both of them differ in the following ways:

Business expenses that have been incurred but are not due to be paid yet are known as accrued expenses. No matter when the payment is made, this type of expense is recorded in the books of accounts when it is incurred.

However, the term outstanding expense refers to an expense that has been incurred and is already past due.

It is uncommon to see frequent overdue payments as it impacts a buyer’s ability to purchase raw materials on credit and any delayed payment is seen as a doubtful debt which is different from bad debts.

What may happen if outstanding expenses are not recorded?

• There will be an understatement of liabilities.
• There will be an overstatement of profits.
• As a result, there is a risk that the financial statements will be incorrect.
• The company may have to face legal issues as a consequence of this.

>Related Long Quiz for Practice Quiz 34 – Outstanding Expenses

>Read Bad Debts