Does SG&A Include Depreciation Expense?

Financial statements provide a comprehensive overview of a company’s economic activities and financial health. Among these reports, the income statement details a company’s revenues and expenses over a specific period, ultimately revealing its profitability. Understanding how various expenses are categorized and presented on this statement is fundamental for gaining insights into a company’s operational structure. This categorization helps stakeholders discern where a company’s resources are being utilized and how efficiently it manages its costs. The classification of expenses like Selling, General, and Administrative (SG&A) costs and depreciation expense is particularly important in this context.

Understanding Selling, General, and Administrative (SG&A) Expenses

Selling, General, and Administrative (SG&A) expenses represent the non-production costs incurred in running a business. These are the operating expenses that are not directly tied to the manufacturing or acquisition of goods or services offered for sale. SG&A typically encompasses two broad categories: selling expenses and general and administrative expenses.

Selling expenses are costs associated with marketing, distributing, and selling a company’s products or services. This includes expenditures such as advertising campaign costs, marketing department salaries, sales commissions paid to staff, and delivery expenses for finished goods.

General and administrative expenses cover the day-to-day operational costs of a business that are not directly related to selling or production. Examples include the salaries of executive and administrative personnel, office rent, utility bills for corporate facilities, and professional fees for legal and accounting services. Office supplies and certain research and development costs also fall under this category.

Understanding Depreciation Expense

Depreciation expense is an accounting method used to systematically allocate the cost of a tangible asset over its estimated useful life. This practice aims to match the expense of using a long-term asset with the revenue it helps generate over time. It reflects the gradual consumption, wear and tear, or obsolescence of an asset as it contributes to business operations.

Common types of tangible assets subject to depreciation include machinery, equipment, buildings, vehicles, and office furniture. The concept of an asset’s useful life refers to the period during which the asset is expected to provide economic benefits to the company. Salvage value, also known as residual value, is the estimated worth of an asset at the end of its useful life.

Several methods can be used to calculate depreciation, each distributing the asset’s cost differently across its useful life. The straight-line method allocates an equal amount of expense each period, providing a consistent charge to income. Conversely, accelerated methods, such as the declining balance method, recognize a larger portion of the expense in the earlier years of an asset’s life.

Depreciation’s Treatment in Financial Reporting

Depreciation is not universally included as a standard component within the Selling, General, and Administrative (SG&A) line item on an income statement. Its placement depends on the specific function of the asset being depreciated. The primary determinant for where depreciation appears is whether the asset directly supports the production of goods, or if it contributes to selling, general, or administrative activities.

Depreciation of assets directly involved in the manufacturing process is typically included in the Cost of Goods Sold (COGS). For instance, the depreciation of factory machinery, production equipment, or the manufacturing plant building itself becomes part of the cost of producing the inventory.

When depreciation relates to assets that do not directly support production and are not strictly selling or administrative in nature, it might be reported as a separate line item. This often appears below the gross profit section of the income statement, or it could be grouped with other operating expenses.

However, depreciation can be found within SG&A when the depreciated asset directly supports selling, general, or administrative functions. For example, the depreciation of office furniture and fixtures used by administrative personnel would be classified under general and administrative expenses. Similarly, the depreciation of company vehicles utilized by sales staff or corporate executives falls under selling or administrative expenses, respectively. Depreciation on computer equipment used by accounting or human resources departments, or on a building housing a sales office or the corporate headquarters, would also be appropriately categorized within SG&A.