What Are General and Administrative Expenses (G&A)?
General and administrative (G&A) expenses are incurred in the day-to-day operations of a business and may not be directly tied to a specific function or department within the company. General expenses pertain to operational overhead expenses that impact the entire business. Administrative expenses are expenses that cannot be directly tied to a specific function within the company such as manufacturing, production, or sales. G&A expenses include rent, utilities, insurance, legal fees, and certain salaries.
G&A expenses are a subset of the company’s operating expenses, excluding selling costs.
- General and administrative (G&A) expenses are expenses unrelated to a specific business unit or function, which may be incurred as a benefit to the company as a whole.
- G&A expenses are displayed on the income statement below the cost of goods sold (COGS).
- A portion of G&A expenses are fixed, as they are incurred regardless of the level of production or sales in a given period.
- For the variable portion of G&A expenses, management will attempt to reduce G&A expenses to the greatest extent possible because they do not have a direct impact on the good or service being provided to customers.
Understanding General and Administrative Expenses (G&A)
General and administrative (G&A) expenses are listed below cost of goods sold (COGS) on a company’s income statement. The top section of an income statement always displays the company’s revenues for the given accounting period. COGS is deducted from the net revenue figure to determine the gross margin. The general and administrative expenses are then deducted from the gross margin to arrive at net income. Not all general and administrative expenses are grouped as one line item. For example, fees and interest may be classified as their own line item when deducting expenses to arrive at net income.
Even in the absence of any production or sales, a portion of G&A expenses will still be incurred. Therefore, many G&A expenses are fixed dollar amounts that are not easily affected through cost-reduction strategies. Other G&A expenses are semi-variable. For example, some minimum level of electricity will always be used by a business just to keep the lights on and necessary machines running. Beyond that point, measures can be taken to reduce unnecessary spending on electricity.
Because G&A expenses may be eliminated without direct impact on the production or sale of goods and services, management has strong incentive to minimize these types of expenses. Companies with centralized management typically experience higher G&A expenses compared to companies with decentralized management structures. The sales to administrative expense ratio compares a company’s sales revenue to the amount of expenses incurred in supporting operations.
Most G&A expenses incurred can be deducted on the entity’s tax return provided the expenses are reasonable, ordinary, and necessary. These expenses must be deducted in the year they were incurred, and they must have been used during the usual course of business.
G&A expenses are those which are related to the day-to-day costs of running a business and may vary depending upon the industry or the individual company.
Examples of General and Administrative Expenses (G&A)
Examples of general and administrative (G&A) expenses include building rent, consultant fees, depreciation on office furniture and equipment, insurance, supplies, subscriptions, and utilities. Salary and benefits attributable to certain employees, such as corporate management as well as the legal, accounting, and information technology (IT) departments are also classified as G&A expenses.
To view the full costs associated with running certain business units, a company may allocate its G&A expenses out to each business unit based on a percentage of revenue, expense, square footage, or other measure. As a managerial accounting technique, reviewing this information with internal management allows for more informed decisions about expanding or reducing individual business units.
For example, if the total electricity bill at XYZ Company is $4,000 per month, and the business records the electricity bill under general and administrative expense, it can allocate out the electricity costs to individual departments based on square footage. Assume the production facility is 2,000 square feet, manufacturing is 1,500 square feet, accounting is 500 square feet, and sales is 500 square feet. The total square footage is 4,500, so the electric bill could be allocated out to each department as follows: production $1,777.78 (2,000 / 4,500 * $4,000), manufacturing $1,333.33 (1,500 / 4,500 * $4,000), and accounting and sales both receive $444.44 (500 / 4,500 * $4,000).
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