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Claiming your expenses are too low could prevent you from receiving much-needed tax breaks, but claiming too much could mean you find yourself ultimately owing more than you expected. In an income statement, gross profit less SG&A (and depreciation expense) equals the operating profit, also known as earnings before interest and tax (EBIT). For example, companies are often required to maintain insurance and may find it impossible to operate without incurring a cost of maintain its headquarters.
Selling, General & Administrative (SG&A) Expense
Reported separately from COGS, these expenses are deducted from gross margin to determine a company’s net income. There are several subtle differences between SG&A expenses and operating expenses. Larger companies often separate these types of costs into smaller, specific SG&A categories as this is often easier for companies to track and monitor costs in these groups. Management often has discretion how many of these costs are reported on the income statement in respects to how to group these types of costs. Direct expenses are those incurred at the exact point-of-sale for a product or service. Examples of direct selling expenses include transaction costs and commissions paid on a sale.
This line item includes nearly all business costs not directly attributable to making a product or performing a service. SG&A includes the costs of managing the company and the expenses of delivering its products or services. A company must incur many different types of costs to run a business, and many of those expenses are not directly tied to making specific products. These broad costs are classified as selling, general, and administrative costs.