Selling, General, and Administrative Expenses: Understanding Recurring vs. Non-Recurring Costs
Differentiating between Frequent and Infrequent Outlays: Understanding the Key Disparities
Selling, general, and administrative (SG&A) expenses are a broad category of costs associated with the day-to-day operations of a business. These expenses cover both recurring and non-recurring expenditures, each reported differently on the company's financial statements. SG&A expenses primarily differ based on predictability, frequency, and impact on a company's finances.
Key Takeaways
- Recurring and nonrecurring expenses play a significant role in analyzing a company's financial health.
- Recurring expenses are ongoing, predictable costs crucial for daily business operations.
- Non-recurring expenses are one-time or uncommon costs that often result from unusual or exceptional events.
Recurring Expenses
Recurring SG&A expenses are necessary for frequent business operations. Examples include salaries, travel expenses, research and development costs, computer support services, and depreciation. These expenses are ongoing costs incurred beyond the basic cost of the product sold, typically appearing as indirect costs on the income statement after net revenue calculation.
Companies manage the reporting of recurring expenses based on their unique operations. Some may combine all recurring expenses into one line item (e.g., SG&A or G&A), while others may use more detailed line items. On the balance sheet, recurring expenses are reported as liabilities, with short- and long-term obligations delineated. On the cash flow statement, recurring charges are usually represented in operating activities.
Non-Recurring Expenses
Non-recurring expenses can be complex due to their various sources, such as mergers, acquisitions, large-scale facility upgrades, severance pay, or repair costs following a disaster. Companies may need to report nonrecurring expenses in a way that differentiates them from recurring expenses.
Nonrecurring charges can impact GAAP (Generally Accepted Accounting Principles) and non-GAAP reporting. Companies may make adjustments to GAAP net income to account for nonrecurring expenses. These expenses can be crucial for investors to note when analyzing a company's financial performance because they may skew profitability for the accounting period.
Reporting on Financial Statements
- Recurring expenses are recorded as operating expenses on the income statement, affecting the operating income and net profit as regular costs of doing business.
- Non-recurring expenses may be separated out or disclosed in notes because they can distort the analysis of ongoing profitability, often reported below operating income or as "extraordinary items" depending on accounting standards and materiality.
Common Examples
| Expense Type | Examples ||---------------|-------------------------------------------------|| Recurring Expenses | Rent or mortgage payments, utility bills, payroll, SaaS subscriptions, insurance premiums, routine maintenance, regular marketing expenses, loan repayments, professional service fees, office supplies, business and property taxes || Non-Recurring Expenses | Asset purchases (e.g., real estate, equipment), legal settlements, restructuring costs, patent acquisitions, major one-time repairs, investment losses, gains not related to core business |
In conclusion, recurring expenses are predictable, regular costs required for operating a business, while non-recurring expenses are uncommon, one-time or unusual costs that impact the financial statements in a different way, providing clearer insight into a company's ongoing business performance. [1][4][5]
In the context of business finances, personal-finance management could be significantly improved by understanding the distinction between recurring and non-recurring expenses, as these play a crucial role in analyzing a company's financial health. For instance, recurring expenses such as salaries, utilities, and rental payments are ongoing costs that typically appear on an income statement as indirect costs on the income statement after net revenue calculation (similar to itco costs for personal finances). On the other hand, non-recurring expenses like the costs of asset purchases, major one-time repairs, or legal settlements are one-time or uncommon costs resulting from unusual or exceptional events, which may require separate reporting to properly analyze a company's ongoing financial performance.
