--- title: "What Are Operating Expenses? Definition & Example | MCC" description: "The regular costs of running a business that are not part of cost of goods sold. A worked example and how it differs from cost of goods sold." url: "https://mcc-solutionsnj.com/bookkeeping/glossary/operating-expenses" --- Bookkeeping glossary # What are operating expenses? The regular costs of running a business that are not part of cost of goods sold. By [Matthew Coleman](/about), MCC Solutions [![Intuit ProAdvisor Gold tier badge](/img/credentials/intuit-proadvisor-gold.png)](https://proadvisor.intuit.com/app/accountant/search?searchId=matthew-coleman77)Gold tier in Intuit's ProAdvisor program. [See my Intuit listing](https://proadvisor.intuit.com/app/accountant/search?searchId=matthew-coleman77) Keeping your own books? Tallyfinch does invoices, bank import and reports on your computer. [See Tallyfinch](/bookkeeping/mcc-books-downloadable-bookkeeping-software) ## In plain English Rent, software, insurance, advertising and office costs are typical. Want a second pair of eyes on your books? [A free bookkeeping health check](/bookkeeping/health-check). Subtracting them from gross profit gives operating income. ## Why it matters Operating expenses are the costs you pay whether or not you sell anything this month. They set your break-even point. If rent, software and insurance creep up while sales stay flat, profit shrinks without any single bill looking alarming. Separating these costs from cost of goods sold also matters for pricing. Mixing them makes gross margin look worse and can push you to raise prices for the wrong reason. ## Worked example Gross profit $80,000 minus operating expenses $56,000 is operating income of $24,000. ## How to handle it - Group operating expense accounts into a handful of clear categories, such as occupancy, people, marketing and admin. - Make sure costs tied directly to a product or job go to cost of goods sold instead. - Run a twelve-month trend report on operating expenses and look for steady climbs. - Review recurring subscriptions every quarter and cancel anything no longer used. ## Common mistakes - Putting job materials or subcontractor costs into general expenses, which inflates gross margin and hides job losses. - Creating a new expense account for every vendor, which makes the report too long to read. - Recording equipment purchases as office expense when they should be capitalized, which distorts both profit and assets. ## Not the same as: Cost of goods sold (COGS) Cost of goods sold changes with each sale because it is the direct cost of what you sold. Operating expenses are the overhead of keeping the doors open and mostly stay put when sales rise or fall. [See Cost of goods sold (COGS)](/bookkeeping/glossary/cost-of-goods-sold). ## Go deeper - [Expense Categorization Rules of Thumb](/bookkeeping/guides/expense-categorization-rules-of-thumb): Practical rules for categorizing business expenses consistently: how to choose categories, handle gray areas and keep tax time simple. ## Try it [Use the related free tool](/bookkeeping/operating-margin-calculator). ## Related terms - [Owner's draw](/bookkeeping/glossary/owner-draw): Money a sole proprietor or partner takes out of the business for personal use. - [Payroll liabilities](/bookkeeping/glossary/payroll-liabilities): Amounts withheld from pay or owed by the employer that have not yet been remitted. - [Net margin](/bookkeeping/glossary/net-margin): Net income as a percentage of revenue. ## Common questions **What are operating expenses?** The regular costs of running a business that are not part of cost of goods sold. **Can you give an example of operating expenses?** Gross profit $80,000 minus operating expenses $56,000 is operating income of $24,000. **Is owner salary an operating expense?** In a corporation that runs payroll, wages paid to an owner employee are generally an operating expense. A sole proprietor's draws are not; they reduce equity instead. **Are interest and taxes operating expenses?** They are usually shown below operating income as other expenses. That keeps the operating line focused on the day to day cost of running the business. General information, not tax, legal or accounting advice. Confirm rules with the IRS, the NJ Division of Taxation or a licensed professional. Need help? [### Monthly bookkeeping Categorizing, reconciling and monthly reports, with cleanup, payroll and NJ filings available. Bookkeeping →](/bookkeeping/) [Full glossary](/bookkeeping/glossary) Do it yourself ### Solopreneur Money Toolkit Estimate the tax, compare the offer, keep the calendar and run the business from one organized set of files. [See what's inside ($99)](/toolkits/solopreneur-money-toolkit)14-day full refund [![Cover of Bookkeeping Fundamentals (ebook) by Matthew Colt](/img/toolkits/bookkeeping-fundamentals-ebook/cover.webp)](/toolkits/bookkeeping-fundamentals-ebook) From the bookshelf ### Bookkeeping Fundamentals A college-level bookkeeping course, without the tuition. By Matthew Colt, $9.99 as an ebook (EPUB and PDF). [See the book](/toolkits/bookkeeping-fundamentals-ebook) [Read the first pages free](/toolkits/bookkeeping-fundamentals-ebook#free-starter) Tallyfinch ### Books you keep on your own computer Tallyfinch does invoices, bills, bank import, reconciliation and the main reports, in a file you own. $99 once, then $5 a month for updates; the app keeps working if you stop the plan. It does not do payroll or sales tax filing. The free download records up to 60 entries. [See Tallyfinch](/bookkeeping/mcc-books-downloadable-bookkeeping-software) [Download it free](/tools/pro/trial/mccBooks) [Compare the three apps](/software) ## Rather have us keep the books? Ask for a quote. [Get a Quote](/bookkeeping/#interest)[Call (908) 444-6373](tel:+19084446373)