The income statement applies the matching principle, which associates the costs incurred with the revenue earned during the same period.
The expenses represent the costs a business incurs to generate revenue during a specific accounting period. These expenses are generally divided into cost of goods sold (COGS), operating, and non-operating expenses.
Cost of goods sold (COGS): The direct costs of producing goods, including material costs and direct labor. It excludes indirect expenses, such as distribution costs and sales force costs.
Operating Expenses: These are costs that a business incurs to perform its core activities, which are the primary activities that generate revenue. Examples include rent, equipment, inventory, marketing, payroll, and insurance.
Non-Operating Expenses: These costs are not directly required for a business's core activities. Examples include borrowing costs, interest charges, losses from lawsuits, foreign exchange losses, and costs related to asset disposal.
Monitoring expenses helps improve operational efficiency, supports informed decision-making, and ensures financial health. Well-managed expenses also boost investor confidence by indicating stronger profitability potential.
