Direct and Indirect Expenses:Learning Objectives:

1. Define and explain direct and indirect expenses.

2. What is the difference between direct and indirect expenses?

Expenses means the expired costs incurred for earning revenue of a certain accounting period. They are the cost of the goods and services used up in the process of obtaining revenue. In other words, it becomes possible to earn revenue with the help of expenses. For example, purchase of goods, wages, salaries, rent, carriage, customs duty etc. We have to incur all these expenses in order to earn revenue. Expenses are mainly divided into two categories:

1. Direct expenses

2. Indirect expenses

These two types of expenses are briefly discussed below:

Direct Expenses:

Expenses connected with purchases of goods are known as direct expenses. For example, freight, insurance, of goods in transit, carriage, wages, custom duty, import duty, octroi duty etc. Without incurring these expenses, it is not possible to bring the goods from the purchase point to the godown of the business. such expenses are collectively known as direct expenses.

Indirect Expenses:

All expenses other than direct expenses are assumed as indirect expenses. Such expenses have no relationship with purchase of goods. Examples of indirect expenses include rent of building, salaries to employees, legal charges, insurance of building, depreciation, printing 

What is the difference between "Direct Expenses" and "Indirect Expenses"?There are 2 types of expenses that you can deduct related your home office/business:  Direct Expenses and Indirect Expenses. 

Direct Expenses:  Direct expenses are those expenses that are paid only for the business part of your home.  For example, if you pay for painting or repairs only in the area used for business, this would be a direct expense. 

Indirect Expenses:  Indirect Expenses are those expenses that are paid for keeping up and running your entire home.  Examples of indirect expenses generally include insurance, utilities, and general home repairs.  Since these are expenses you would pay for the entire home, these are considered indirect expenses. Note:  If you paid one of these separately and specifically for the part of your home you are using for business, these could be considered "direct expenses".  For example, if you paid separate utilities that were specifically for your home office, this could be considered a direct expense.  If any part of that bill included utilities for the whole house, though, that would be an indirect expense.

Examples of Indirect Exps.- 1.Accounts charges a/c 2.ATM charges a/c 3.Bad debts a/c 4.Bank charges a/c 5.Bank commi. a/c 6.Bank int. a/c 7.Carriage outward a/c 8.Charity exp's a/c 9.Commi. a/c 10.Diesel exps. a/c 11.Diccount a/c 12.Electricity Bills a/c 13.Interest a/c 14.Rent a/c 15.Salary a/c and many others......... 

Examples of Direct Exps.- 1.Wages a/c 2.Freight exps. a/c 3.Power&Fuel a/c 4.Factory exps. a/c 5.Factory rent a/c 6.Manufacturing exps. a/c 7.Octroi a/c 8.Coal,Gas&Water a/c 9.Carriage Inward a/c 

Difference Between Trading Account and Profit and Loss Account:

Learning Objectives:

1. Differentiate between trading account and profit and loss account.

Following are the main points of difference between trading account and profit and loss account:

  Trading Account   Profit and Loss Account

1 It is the first stage of final accounts. 1It is the second stage of the final accounts.

2It shows the gross result (gross profit or gross loss) of the business.

2It shows the net results (net profit or net loss) of the business.

3

All direct expenses (expenses connected with purchase or production of goods) are considered in it.

3All expenses connected with sales and administration (indirect expenses) of business are considered.

4It does not start with the balance of any account.

4It always starts with the balance of a trading account (gross profit or gross loss).

5Its balance (G.P or G.L) is transferred to profit and loss account.

5Its balance (N.P or N.L) is transferred to capital account in balance sheet.