The next category of expenses to be subtracted is the operational expenses. These are the costs of running a business that are not directly related to the production of goods and services. They include selling, general, and administration (SG&A), which consist of all the costs of selling and marketing the products and services, including the salaries of the sales and marketing personnel. Operating expenses also includes research and development, which is the money invested to develop new products and services. A third type of operating expense is depreciation and amortization.
Depreciation is how accounting recognizes the fact that assets wear out and lose value over time. Instead of subtracting the whole cost of the asset, the cost is allocated over the asset’s expected life. With straight-line depreciation, the asset loses the same amount of value each year, and so the annual depreciation expense will be equal to the cost of the asset divided by the number of years.
Income Statement for Northwest Coffee, Inc. (in millions)
