Administrative Expenses Journal Entry
Administrative expenses are the costs incurred in running a business, such as salaries, rent, utilities, office supplies, and so on.
Administrative Expenses are distinct from production expenses, which are the costs of goods or services that a company produces or sells. They are the costs incurred in running a business that is not directly related to production.
On the other hand, production expenses are the costs associated with creating the goods or services that a company sells. This can include raw materials, labor costs, and manufacturing overhead.
While both types of expenses are necessary for a business to function, they are different from one another. Administrative expenses are typically fixed costs that do not fluctuate based on production levels, while production expenses are variable costs that increase as more goods or services are produced. As a result, a company’s financial statement will typically show two separate sections for these two types of expenses.
While administrative expenses can vary widely from one business to another, they typically represent a significant portion of a company’s overall operating budget. For many businesses, reducing administrative expenses is a crucial goal. It is the way in which company can save the expense to increase profit.
The company will record the administrative expense on the income statement. The amount of the expense will be based on the actual costs incurred during the period, such as salaries and rent. The company will also include an estimate of future costs, such as bonuses. The purpose of recording administrative expenses is to provide an accurate portrayal of the company’s financial performance. By including these expenses on the income statement, investors and creditors can get a better understanding of the company’s overall profitability.
Journal Entry for Administrative Expense
The administrative expense will be recorded on the income statement base on the accrual basis. It does not depend on the cash flow. The company needs to record expenses immediately when it has consumed the goods or services which is classified under administrative expense.
The journal entry is debiting administrative expenses and credit accounts payable.
Subsequently, the company needs to settle the accounts payable with the supplier. It is time to remove the accounts payable from the balance sheet.
The journal entry is debiting accounts payable and credit cash.
The company may use a detailed chart account to record the admin expense. However, they will include in the admin expense on the income statement.
ABC is a marketing agency company. Most of the expenses cover administrative expenses. During the month, the company spends $ 75,000 on total administrative expenses. It has already settled the expense with the supplier. Please prepare a journal entry for administrative expenses.
ABC has to record admin expenses to prepare the monthly income statement. The company already making payments, so it will impact the cash balance.
The journal entry is debiting administrative expenses $ 75,000 and credit cash $ 75,000.