Purchases and expenses

Accounting for costs

Unit 16

Costs, Purchases and Expenses are terms regularly used in discussing financial matters and in particular with reference to profit and loss statements.

They are often used to mean the same thing, amounts being paid out by the business in return for goods, services or employee effort (Staff costs).

Turnover less costs indicate whether for the period concerned the business has been profitable or not.

Purchases are a part of costs where a third party supplier has provided goods or services and it does not normally include items such as employee costs or depreciation costs. Not all purchases will immediately be shown in a profit and loss statement. For example the purchases of stock or new fixed assets will appear in balance sheet statements.

Often in profit and loss statements costs are categorised under headings such as Cost of Sales, Distribution Costs and Administrative expenses. These headings arise from presentation formats specified under Company Law for statements from companies that are in the public domain.
For more on this seek advice from a professional advisor.

Cost of Sales will normally include those costs that are directly associated with sales, such as direct material purchases with opening and closing stocks, labour costs and production overheads.

Distribution cost will normally include those costs that are associated with distribution, transportation and warehousing costs as well as sales, marketing and advertising activities.

Administration Expenses will normally include costs associated with general management, administrative buildings and professional advice.

Where a business has employees and is required to publish its profit & loss statement either in the public domain or to HMRC then details of staff costs may be required. These details can include the salaries and wages as well as social security costs (National Insurance) and pension costs.

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