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Accounting encyclopedia · Financial statements

Operating expenses

Operating expenses are the indirect, day-to-day costs of running a business, such as rent, utilities, marketing, insurance, office supplies, repairs and professional fees. They sit below gross profit on the income statement. They differ from the cost of goods sold, which covers the direct cost of what you sell, and from capital purchases, which are spread over time.

Sora Accounting & Tax · General information · Editorial policy
Updated · 3 min read

Overhead sits between gross profit and operating income

Operating expenses are the everyday costs of running the business, deducted from gross profit to reach operating income.

Visual labels: Rent and utilities; Wages and insurance; Marketing and fees.

What counts as an operating expense

Operating expenses, often called overhead or selling, general and administrative expenses, are the costs that keep the business open whether you sell a little or a lot. Common examples are rent and utilities, marketing and advertising, insurance, office supplies, maintenance and repairs, employee benefits, accounting and legal fees, and property taxes.

Direct costs of the product or service you sold belong higher up, in the cost of goods sold. The split matters because gross profit is measured before operating expenses, and operating income is measured after them.

Operating, capital and personal costs

Not every payment is an operating expense. For tax purposes the CRA separates current expenses, which are generally deductible in the year you incur them if they are reasonable and incurred to earn income, from capital expenses, which are not deducted all at once. A purchase of capital property is generally recovered through capital cost allowance instead. Repairs that are capital in nature fall on the capital side.

Two other payments commonly get mixed in. The principal part of a loan payment is not an expense, although interest on money borrowed for business purposes can be deductible. On an income statement, interest is usually shown below operating income rather than within operating expenses. Personal costs are not deductible, so only the business part of a mixed-use cost belongs in your expenses.

An illustrative example

For illustration, a small shop has $200,000 of sales and $120,000 of cost of goods sold, so gross profit is $80,000. Its operating expenses for the year are rent of $24,000, wages for office and sales staff of $20,000, insurance and software of $6,000, marketing of $5,000 and professional fees of $4,000, a total of $59,000.

Subtracting $59,000 from $80,000 leaves operating income of $21,000. If the owner buys a $9,000 piece of equipment during the year, that purchase does not reduce operating income in full. It is recorded as an asset and recovered over time. The numbers are round and illustrative only.

Common mistakes and what to discuss with your accountant

The usual problems are inconsistent coding, personal spending run through the business, and capital purchases booked as ordinary expenses. Missing receipts are another. Keeping supporting documents for each expense is what lets you stand behind the figure later.

Ask your accountant which of your costs are operating and which are direct, how to treat larger purchases, how to split mixed business and personal costs, and whether your categories make monthly comparisons meaningful. Bring a full year of statements and the invoices behind any unusual items.

Sources & editorial notes

Sources checked October 24, 2026. The examples are illustrative and provide general information. Discuss how the guidance applies to your circumstances with your accountant.

Rules and guidance can change. Use the current official source and confirm the treatment for your facts. To flag an error, contact Sora.