Expenses are the costs a company incurs to earn its revenue. On the profit and loss statement they include the cost of goods sold, employee costs, selling and administrative costs, depreciation, interest and tax. Revenue minus expenses is profit. For an investor, the mix and trend of expenses show how efficiently a company runs. For a trader, trading costs are also expenses, and for F&O income they can be deducted from taxable profit.
Every rupee a company spends to run its business is an expense. The term is broad. It covers the steel a car maker buys, the salaries it pays, the power its plants use, the advertising it runs, the wear on its machines and the interest on its loans. The profit and loss statement lists these in a fixed order, and the gap between revenue and the running total of expenses at each stage gives the margins investors watch.
The main types
Cost of goods sold, or cost of materials, is what it costs to make or buy the product being sold. Employee benefit expense is salaries, bonuses and provident fund contributions. Other expenses is the catch-all for rent, power, freight, advertising, travel and professional fees, and it is where selling, general and administrative expenses sit. Depreciation and amortisation is the yearly charge for the wearing out of plant, machinery and intangible assets. Finance cost is interest on borrowings. Tax expense is what is owed to the government on the profit. Indian companies report them in this order under Schedule III of the Companies Act, which makes one company's statement easy to compare with another's.
Operating and non-operating
Operating expenses are the costs of the core business: materials, people, selling and overheads. Non-operating expenses sit outside it, mainly interest and one-off items such as a loss on selling a factory. The split matters because operating profit, which is revenue minus operating expenses, shows how well the business itself works before the effects of how it is financed. Two companies with the same operating profit can report very different net profits if one carries far more debt.
Fixed and variable
Variable expenses rise and fall with sales. Raw materials are the clearest case. Fixed expenses stay the same whether sales rise or fall, such as rent, most salaries and depreciation. A company with high fixed costs has operating leverage. When sales grow, profit grows much faster, because the fixed costs are already covered. When sales fall, profit collapses just as fast. Airlines, hotels and steel makers work this way. Understanding which kind of cost dominates tells an investor how a company will behave in a boom and a slowdown.
Capital expenditure is not an expense
When a company buys a machine that will last ten years, the whole cost does not hit the profit and loss statement at once. It is recorded as an asset on the balance sheet and expensed over its life through depreciation. This is capital expenditure, or capex. Operating expenditure, or opex, is spending that is used up within the year. The distinction can be used to flatter profits. A company that classifies routine spending as capex shows higher profit today and higher depreciation later. Reading the cash flow statement, where capex appears in full, is the check.
Reading expenses as an investor
The useful questions are about trend and ratio, not absolute size. Is employee cost growing faster than revenue? Is the other expenses line jumping without explanation? Is depreciation falling because the company has stopped investing? The ratio of each expense to revenue, tracked over five years and compared with peers, is the quickest way to spot a business losing its grip on costs. It also feeds the valuation work in comparable company analysis, since margins drive the multiples peers trade at.
Expenses for a trader
A trader has expenses too. Brokerage, exchange charges, securities transaction tax, GST on brokerage and data subscriptions all come off the gross trading profit. For tax, income from F&O trading is treated as business income, which means these costs, along with a share of internet, software and even a home office, can be deducted before tax is worked out. Intraday equity trading is speculative business income and follows similar rules. Delivery-based investing gives capital gains, where only the cost of acquisition and sale is deductible. What GST applies to in trading is covered in GST on share trading and F&O, and how to report the different kinds of income is in how to report capital gains in the ITR.
FAQs
What is the difference between an expense and a loss?
An expense is a cost of earning revenue in the normal course of business. A loss is a cost with no revenue against it, such as a write-off of a bad investment.
Is depreciation a real expense?
It is a real cost spread over time. No cash leaves in the year it is charged, which is why cash profit is higher than accounting profit for asset-heavy companies.
What is EBITDA?
Earnings before interest, tax, depreciation and amortisation. It is revenue minus operating expenses excluding depreciation, and is used to compare companies with different debt and asset levels.
Can trading losses be set off against salary?
No. F&O losses can be set off against other business income and carried forward for eight years, but not against salary.