Operating expense

Definition

Operating expense refers to the ongoing costs required for running a business's core operations. These expenses include rent, utilities, salaries, and administrative costs but exclude costs directly tied to production or capital investments.

5 Must Know Facts For Your Next Test

1. Operating expenses are critical for determining a company's net profit as they are subtracted from gross profit.
2. They do not include capital expenditures which are long-term investments in assets.
3. Effective management of operating expenses can significantly impact a company's financial health.
4. In budgeting, distinguishing between operating expenses and capital expenditures is crucial for accurate financial planning.
5. Operating expenses are usually recorded on the income statement under 'operating income/expenses'.

Review Questions

• What distinguishes an operating expense from a capital expenditure?
• How do operating expenses impact a company's net profit?
• Where on the financial statements are operating expenses typically recorded?

Related terms

Capital Expenditure: Funds used by a company to acquire, upgrade, and maintain physical assets such as property, industrial buildings, or equipment.

Gross Profit: The difference between revenue and the cost of goods sold before subtracting operating expenses.

Income Statement: A financial statement that shows a company's revenues and expenses over a specific period, culminating in net profit or loss.