SG&A Expenses: How to Calculate and Record SG&A Expenses

Selling, general, and administrative expenses, also referred to as “SG&A,” are the expenses of a business in relation to its overall management and operations. When reported in a company's income statement, SG&A expenses include general expenses for the business, administrative expenses, and any business cost that's not in direct correlation with the delivery of a business' products or its services performed.

Selling expenses are never included in the costs of goods sold, or COGS, because these expenses aren't assigned to specific products and services. Instead, you should list them in the expenses section of financial statements, and they often have ties to cost reductions. Additionally, you incur selling, general, and administrative expenses through the day-to-day operations of a business.

In the context of SG&A expenses, it’s important to understand the difference between net income and operating income. Non-operating expenses impact net income. Some of these expenses include taxes and interest expenses. Net income, also known as the “bottom line,” can fluctuate because of factors such as the sale of assets. Operating income, on the other hand, is key to SG&A. Operating income also includes depreciation and amortization.

Selling, general, and administrative expenses encompass both the direct costs and indirect costs associated with company management and operations. The SG&A expenses that you can list in the expenses section of an income statement are all costs considered non-production. Some examples of SG&A include:

• Administrative: Administrative expenses include rent and insurance, accounting expenses and legal costs, as well as the salaries and wages of administrative staff and other workers.
• Sales: Paid sales commissions, direct selling expenses (like shipping costs), indirect selling expenses (like product advertising and other marketing expenses), and sales consultant phone bills all fall into this category.
• General: This includes travel expenses and equipment purchases, such as buying office supplies. This can also include overhead costs, such as rent and insurance.

SG&A expenses include salaries, rents or mortgages, and payment for non-production personnel. Here are some steps to take to calculate the SG&A expenses of your business correctly:

• Gauge your business expenses. Determine all the areas in which your business spends money. Depending on the specifics of your business, common expenses may include wages and sales commissions, advertising expenses, costs of promotional materials, and sales and marketing team employment taxes.
• Group purchases as either fixed or variable expenses. Determine your business' fixed and variable expenses that may include salaries, utilities, rents, and marketing budgets. While certain costs, such as employee salaries and monthly bills, tend to remain fixed, marketing budgets and purchasing of certain equipment and supplies may vary from month to month.
• Calculate your SG&A ratio. Calculate your SG&A ratio by dividing total costs incurred by your overall total sales. A good example of this calculation is dividing SG&A costs of $5,000 by $20,000 in sales costs. This creates a ratio of 1:4, so the business would dedicate one-fourth of its profits back into SG&A expenses.

You should record SG&A in the expenses section on a company or business income statement. Since these expenses do not connect to a company's specific products, you should not include them in the COGs section.

In certain cases, a business may opt to not combine operational costs with SG&A expenses on an income statement and instead create a separate section for operational costs. However, SG&A expenses are part of day-to-day operations in areas that include company management and the overall costs of delivering products and services to customers and clients.

The main difference between SG&A and operating expenses is how businesses list or record each expense on their income statements.

• There are options when recording expenses. Certain business owners may choose to record selling, general, and administrative expenses separately from operating expenses, and others may opt to record SG&A expenses as subcategories of overall operating expenses.
• It applies to financial statements. When recording SG&A expenses and operating expenses on financial statements, there's no specific rule that states you must list these expenses together or separately; it's entirely up to the business owner. Neither SG&A expenses nor operating expenses are included in the cost of goods sold, as this refers to any expense incurred by the production of goods.
• There is a relation. Operating costs and SG&A expenses are both related to expenses of daily operations, so the terms are actually one and the same.

Examples of operating costs that you may list in a separate subcategory include variable costs that may fluctuate from week to week or month to month, fixed costs, depreciation, and interest. Taxes and other expenses not related to overall production are not considered operational costs.

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