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

1 It is the first stage of final accounts.

It shows the gross result (gross

profit or gross loss) of the business.

All direct expenses (expenses

3

connected with purchase or

production of goods) are considered
in it.

It does not start with the balance of

any account.

Profit and Loss Account

It is the second stage of the final

accounts.

It shows the net results (net profit or

net loss) of the business.

All expenses connected with sales and

3 administration (indirect expenses) of
business are considered.

It always starts with the balance of a

4 trading account (gross profit or gross
loss).

Its balance (G.P or G.L) is

5 transferred to profit and loss
account.

Its balance (N.P or N.L) is transferred

to capital account in balance sheet.