What Are Selling and Administrative Expenses?

Selling and administrative expenses represent the costs a business incurs to operate beyond the direct production of goods or services. These expenses are essential for a company’s daily functioning and for generating revenue, even though they are not directly tied to manufacturing or acquiring products for sale. Understanding and analyzing these costs provides insight into a company’s overhead, operational efficiency, and overall financial performance.

Understanding Selling Expenses

Selling expenses encompass all costs directly associated with promoting, marketing, and delivering a company’s products or services to customers. These expenses are incurred to drive sales revenue and can vary based on the specific sales and marketing strategies employed by a business. They are considered operating expenses because they are necessary for a company to generate sales and maintain its sales operations.

Examples of selling expenses include:

• The compensation for sales personnel, such as salaries and commissions paid on sales.
• Advertising costs for marketing campaigns, promotional materials, and website maintenance.
• Travel and entertainment expenses incurred by sales staff to meet clients or attend trade shows.
• Costs associated with distributing products, such as logistics, shipping fees, and insurance for goods in transit to customers.

Understanding Administrative Expenses

Administrative expenses are the costs incurred for the general management and operation of a business, distinct from those directly related to sales or production. These expenses support the overall functioning, supervision, and coordination of the company. They are often referred to as “overhead” because they are incurred regardless of sales volume and are not directly attributable to the creation of specific products or services.

This category includes:

• Salaries and benefits for executive, administrative, human resources, and finance staff.
• Rent and utilities for general office space, such as electricity, water, heating, internet, and telephone services.
• Legal fees for contract review, litigation, and accounting fees for tax preparation or financial audits.
• Office supplies, general liability insurance, and depreciation of office equipment like computers and furniture.

Classification and Financial Reporting

Accurately classifying selling and administrative expenses is important for clear financial reporting and compliance with accounting standards. These expenses are typically presented on a company’s income statement, often grouped together as “Selling, General, and Administrative (SG&A) expenses.” This combined line item appears below the “Gross Profit” figure on a multi-step income statement.

The inclusion of SG&A expenses is subtracted from gross profit to arrive at a company’s operating income, also known as earnings before interest and taxes (EBIT). This presentation helps financial statement users distinguish between the direct costs of producing goods (Cost of Goods Sold) and the indirect costs of running the business. While U.S. Generally Accepted Accounting Principles (GAAP) do not prescribe a rigid format for the income statement, public companies are subject to SEC regulations that require specific disclosures for expense classification.