What are Selling Expenses?
Selling expenses are the costs which are incurred by the sales department of an organization for selling companies products or providing services; this is mainly related to distributing, marketing & selling. This cost is not directly related to the production or manufacturing of any product or delivery of any services so it is categorized as an indirect cost.
These expenses are generally listed before general & administrative expenses in operating expenses section because creditors & investors are more interested in the cost which is directly contributing in increasing sales hence they are given more priority as compared to general & administration expenses.
List of Selling Expenses Examples
- Logistics Expenses
- Insurance Expenses
- Shipping Expenses
- Advertising Expenses
- Wages & Salaries of Sales Employees
- Selling Commissions
There are certain industries for which advertising is the backbone of their survival, as in the sustainability of that industry is dependent on their selling & marketing strategies, in that case, companies are required to spend heavily on selling expenses. For example, Pepsi & coca-cola have very tough competition hence if one of them comes up with creative advertisement the other company is also pushed to incur such expenses forcefully to keep up their market share.
How to Calculate?
To calculate selling expenses we simply have to add all sales-related expenses which are not directly related to the production process; it can be fixed or variable. Salary payables to sales staff come in fixed expenses however commissions payable is derived based on sales so that can be considered as variable expenses.
Journal Entries of Selling Expenses
#1 – For Accrual Accounting
If we receive a bill and pay it immediately in that case debit an appropriate expense account and credit cash or bank account & if we have received a bill but haven’t paid it before the month-end in that case we have to debit an appropriate expense account and credit accounts payable and when an invoice is paid entry would account payables debit & cash or bank credit.
Sometimes it might happen that we don’t receive any bills for expenses but we can estimate those expenses based on the previous months’ trend. in such cases, we have to accrue expenses based on the budgeted amount. Entry for accrual of such expenses debit the appropriate expenses and credit the accrual expenses account and when we receive bill we can post the reversal entry & reclass accrual expenses to accounts payable and once a bill is paid debit accounts payable & credit cash/bank account.
#2 – For Cash Accounting
Here we have to post journal entry only if we make the payment for bill & entry would be debit appropriate expenses & credit cash or bank account, but if we receive a bill and we don’t pay it before month end then no entry is to be posted hence by following cash accounting we violate the matching principles.
In cash accounting, we don’t have to accrue any budgeted expenses since we debit only expenses for which payments are made.
Budgeting of Selling Expenses
The information related to selling expenses cannot be derived directly so managers use the general level of corporate activity to determine the appropriate budget, it is very common that selling cost is derived by using incremental budgeting which means the amount budgeted is based on most recent actual cost. This budget can be split up into segments based on different geographical areas.
How to Analyze these Expenses?
Management generally calculates the SAE ratio i.e sales to administrative expenses ratio, The higher SAE ratio is better for business & low ratio could reveal inefficiencies in the business.
The formula for calculating SAE ratio:
- Cost-Benefit Analysis – Those expenses which actually contribute to an increasing sale is considered beneficial expenses so proper analyses of such selling expenses will help management to make the decision on where to spend more. Those benefits can sometimes be tangible or intangible, direct or indirect.
- Break-Even Analysis – It is also known as “cost-volume-profit analysis” it helps to know the operating condition of the company that means sales volume at which the organization is recovering all variable & fixed cost. While calculating the break-even point management has to consider both fixed & variable selling expenses. When the company is making losses this point will help management to decide whether production should be stopped or can be continued.
It is one of the important expenses in the income statement it is one of the most essential expenses especially in the FMCG industry where competition is very high however proper management of selling expenses can help an organization to increase its profitability. If they are showing an increasing trend but sales are not increasing then it will show that the company is not operating efficiently or maybe struggling to sell there products or services. So they either need to invest money in distinguishing their products in order to increase the sale or need to improve the service quality.
However, when increased selling expenses helps increasing sale is a good sign and that shows the organization is doing pretty well in the current market scenario.
This has been a guide to what are selling expenses and its definition. Here we discuss journal entries of selling expenses along with examples, analysis, and economics perspective. You can learn more about accounting from the following articles –