General and administrative expense definition
/What is General and Administrative Expense?
General and administrative expense is those expenditures required to administer a business. These expenses are not related to the construction or sale of goods or services. Another way of describing general and administrative expenses is any expense that will still be incurred, even in the absence of any sales or selling activity. This information is needed to determine the fixed cost structure of a business.
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Examples of General and Administrative Expenses
There are many types of general and administrative expenses, including the following:
Salaries and wages. This includes compensation for executive, administrative, and support staff who are not directly involved in production or sales. It covers base salaries, bonuses, and payroll taxes.
Rent and utilities. Costs for leasing office space and paying for electricity, water, heating, and internet services. These expenses are necessary to maintain day-to-day operations.
Office supplies. Expenditures for stationery, printer ink, paper, and other consumables used in administrative tasks. These are recurring costs that support business operations.
Professional fees. Payments to lawyers, accountants, and consultants for services such as legal advice, tax preparation, and financial audits. These fees ensure compliance and provide expert guidance.
Insurance. Premiums for liability, property, and business interruption insurance that protect the company against potential risks and losses.
Depreciation and amortization. The systematic allocation of the cost of tangible and intangible assets over their useful lives, reflecting wear and tear or obsolescence.
Licenses and permits. Fees paid to local, state, or federal authorities for operating licenses, regulatory permits, and certifications required by law.
Travel and entertainment. Costs for business travel, lodging, meals, and client entertainment for executives and administrative staff to conduct meetings or attend conferences.
Telecommunication expenses. Payments for phone services, internet, and mobile data plans required for internal and external communications.
Software and subscriptions. Costs for accounting software, productivity tools, and subscriptions to business-related services, which help in managing administrative tasks efficiently.
Recruitment and training. Expenses for job advertisements, background checks, and onboarding of new employees, as well as costs for staff training and development programs.
Bad debt expense. Provisions for uncollectible receivables when customers fail to pay their outstanding balances, impacting the company’s net income.
Bank fees and charges. Costs for maintaining business accounts, including monthly maintenance fees, wire transfer charges, and interest on short-term borrowings.
Security services. Payments for physical security guards, surveillance systems, and cybersecurity measures to protect assets and sensitive information.
Office maintenance and repairs. Costs for cleaning services, minor repairs, and upkeep of administrative office space to ensure a safe and functional work environment.
General and administrative expense is generally not considered to include research and development (or engineering) expenses, which are usually aggregated into a separate department.
How to Control General and Administrative Expenses
There tends to be strong cost-reduction pressure on general and administrative expenses, since these costs do not directly contribute to sales, and so only have a negative impact on profits. However, many of these expenses are fixed in nature, and so can be fairly difficult to eliminate in the short term. One control technique is zero-base budgeting, where budgets are not automatically rolled forward from the prior year. Instead, all expenses must be justified before they will be allowed into the next year’s budget.
A company that has a strong, centralized command-and-control management system in place is likely to spend much more on general and administrative expenses than a business that has a decentralized organizational structure, and which therefore does not require extra staff to control the activities of subsidiaries. Consequently, switching away from a command-and-control system can reduce these expenses.
Presentation of General and Administrative Expense
General and administrative expenses appear in the income statement immediately below the cost of goods sold. They may be integrated with selling expenses (in which case the cluster of expenses is known as selling, general and administrative expenses), or they may be stated separately. In the following exhibit, we highlight the cluster of selling, general and administrative expenses on an income statement.
