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.
Related AccountingTools Courses
The Interpretation of Financial Statements
Examples of General and Administrative Expenses
There are many types of general and administrative expenses, including the following:
Accounting staff wages and benefits
Building rent
Consulting expenses
Corporate management wages and benefits (such as for the chief executive officer and support staff)
Depreciation on office equipment
Insurance
Legal staff wages and benefits
Office supplies
Outside audit fees
Subscriptions
Utilities
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.
