These are expenses required to operate the business for the purpose of earning revenue. It is common for retail and wholesale businesses to classify their operating expenses for the purposes of control using the following categories:

• Selling and distribution expenses Expenses incurred in the period directed at promoting and distributing the product, e.g. commission, advertising, freight out (cartage outwards) and salespersons’ salaries.

• Administrative expenses Expenses incurred in the period which are applicable to the office function of the business (office expenses), e.g. office wages, telephone expenses, rent of office premises, clears’ wages and lighting.

• Financial expenses Expenses incurred in the period which are related to the financial function of the business, e.g. interest expense, discount expense and bad debts. (Discount revenue can be shown as a negative expense.)

• Miscellaneous expenses Minor expenses incurred in the period which are of a regular nature and cannot be classified into any of the above categories, e.g. donations and legal expenses.

Total expenses

This is a tabulation of all expenses incurred in running your business, exclusive of taxes or interest expense on interest income, if any.

Net income before taxes

This number represents the amount of income earned by a business prior to paying income taxes. This figure is arrived at by subtracting total operating expenses from gross profit.

Taxes

This is the amount of income taxes you owe to the federal government and, if applicable, state and local government taxes.

Net income

This is the amount of money the business has earned after paying income taxes.