Businesses of all different sizes report their operating profits and expenses on an income statement. It’s one of the main report cards defining the business and the effectiveness of its management’s performance over the accounting period. Income statements are broken down into different sections. Selling and administrative expenses is a large portion of a company’s balance sheet, and may represent a large portion of the company’s total operating budget
Definition
Selling and Administrative Expenses, also called Selling, General and Administrative Expenses, are the net operating expenses of the business that are not part of the cost of goods sold. Examples of selling and administrative expenses include advertising and the salaries of people not directly related to manufacturing a product, as well as recurring expenses as insurance and rent.
Background
Due to the potentially large impact that selling and administrative expenses have on a company’s financial statement, managers and owners must watch each expense carefully, making sure that each expenditure is necessary to continued business profit. Selling and administrative expenses can be cut when managers need to make an impact on their financial statements quickly. Deferring or haphazard cutting of these expenses, though, can cause problems over the long term, as advertising and sales people’s commissions may be among the expenses cut, which could cause sales to drop and net profits to erode.
Calculating from an Income Statement
On most income statements, the cost of goods sold is calculated close to the top part of the income statement, and is generally subtracted from the total sales as part of the gross profit calculation. The other expenses listed directly below the gross profit are often selling and administrative expenses, with the exception of depreciation. You can calculate the selling and administrative expenses by subtracting the net profit or loss from the total gross sales and depreciation of the business.
Fixed and Variable Expenses
Selling and administrative expenses are also called operating expenses. Some expenses will increase or decrease depending on the amount of sales that a company makes. These are called variable expenses. Other expenses do not change depending on sales volume, such as business rent or insurance. These are called fixed expenses. Some selling and administrative expenses are variable, such as sales commissions, but most selling and administrative expenses are relatively fixed, and do not fluctuate simply because sales amounts rise and fall.