Conversely, the cost of supplies used by the accounting department and the salary of the human resources manager are definitely in SG&A, not in COGS or COS.īut then there’s the gray area-and it’s enormous. Some of these decisions are easy: for example the wages of the people on the manufacturing line or the cost of materials used to make the product should definitely go in COGS or COS. The accounting department has to make decisions about what to include in COGS or COS and what to put somewhere else. Another category of operating expense is selling, general, and administrative expenses (SG&A). It includes all the costs directly involved in producing a product or delivering a service. Cost of goods sold or cost of services (also known as COGS and COS) is one category of business expenses. For example, the same expense might be accounted for differently by two different companies, and both companies might still be in perfect compliance with GAAP. GAAP says that all operating expenses must be reflected on a company’s books however, it does not say how to categorize them specifically. One example of the way GAAP can be applied concerns how to account for operating expenses. When a company wants to change how they apply GAAP, they must publicly disclose the change. However, once they pick how they are going to apply GAAP, they must be consistent and use it on an on-going basis. Companies take those guidelines and apply a logic that makes sense for their particular situations. GAAP runs for thousands of pages and spells out a lot of detailed rules. The Financial Accounting Standards Board (FASB) defines and amends GAAP. Securities and Exchange Commission (SEC) requires that GAAP be followed by all companies whose stock is publicly traded on the open market. GAAP stands for Generally Accepted Accounting Principles.
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