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August 21, 2025·Accounting·Pasento

What are operating expenses?

The ongoing costs of running the business that are not direct costs of sale. Abbreviation: opex.

Definition

Operating expenses are the period costs of keeping the doors open after you have already subtracted the product cost of what you sold. On the books, they are Income Statement costs, not a Balance Sheet holding and not the stock that left with a sale.

A shop's rent, clerk wages, utilities, and card-processing fees sit here. The cost of the goods that sold sits above this block as product cost.

People often shorten the name to opex. It is not a Balance Sheet account, though unpaid or prepaid pieces of it can sit on the Balance Sheet until they clear.

Accrual books record this month's rent in this month, even if the check goes out later. Cash-basis books may wait until the bill is paid.

Where it shows up

P&L: Located below gross profit, before operating income.

Balance sheet: Related to accrued and prepaid operating costs still sitting open.

Cash flow: Decreases when rent and similar bills are paid, reported cash from operating activities decreases.

See also: Selling General And Administrative Expenses · Operating Income · Income Statement

When you look at your Income Statement, this block sits under the leftover after product cost. Revenue and cost of goods sold are above it; interest and tax sit further down.

When the block is high relative to sales, the shop spent more to stay open. When it is low, rent, wages, or utilities were light, or the shop cut a recurring bill.

The Balance Sheet does not keep this period's total after the close. Unpaid pieces can sit in accounts payable or accrued liabilities; paid-ahead pieces can sit in prepaid expenses.

On the Statement of Cash Flows, paying rent and similar bills is the cash event. Cash from operating activities falls when those checks leave the bank.

Inventory of goods still on the shelf is not this cost. Those copies stay in current assets until they sell.

How it works

This block usually covers:

  • Occupancy costs such as rent and utilities
  • Wages for people who keep the doors open
  • Other period overhead such as card fees and office insurance

A bill for this month's occupancy arrives, or a clerk works a week of shifts. The cost belongs to this period even if cash has not moved.

If the landlord has invoiced and the check is still unwritten, the shop debits this cost and credits accounts payable. The month already used the space.

A prepaid annual insurance policy starts as prepaid expenses. The piece that belongs to this month then moves out of that prepaid balance and onto this cost.

Stay with the period's keep-the-doors-open costs when you read this block. Do not fold in the cost of the goods that sold; that subtraction already happened above.

Clerk wages that support the floor usually sit here. They are not the same as the invoice cost of an item that left with a customer.

After the month closes, this block is part of the period's profit story. Next month starts the count again from zero.

Do not treat the payment as a new cost if the bill was already recorded. The payment clears the payable; this cost was booked when the month used the space or the work.

A credit card payable can hold a utility charge until the card is paid. The cost still belongs in this block in the month the utility was used.

Example

Page & Spine receives this month's store rent bill for $3,500. The space was used this month, and the check has not been cut.

The shop records:

Debit: Operating expenses $3,500

Credit: Accounts payable $3,500

This cost hits the Income Statement, and accounts payable (a liability) goes up by $3,500. Cash has not moved.

The leftover after book cost is now $3,500 smaller on the way to operating income. The Balance Sheet is larger on the liability side until the landlord is paid.

When the check is sent, the shop clears the $3,500 payable and cash falls. This cost stays at $3,500; only the payable and the bank account move.

If the same month also had clerk wages and utilities, those items join the same block. The rent line is only one piece of the month's keep-the-doors-open cost.

Common mix-ups

Operating expenses are not the same as product cost. Product cost is the books that sold; this block is rent, wages, and the other costs of staying open.

Operating expenses are not the same as the cash that left the bank. A recorded rent bill is already this cost, even if the check is still on the desk.

Operating expenses are not the same as the SG&A grouping on every shop's statement. Some shops use this block as the whole overhead section; others split selling costs from general costs inside it.

Related terms