How to calculate operating expense?



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As you explained that COGS for an it co. will be salary paid to employees, then what about hardware cost and electricity cost and also cost of additional software used in building of the software for client of the co.

Also I would like to ask you that accrual concept says that the entry has to be made whenever cash changes the hands even if the transaction takes place in the next month, but here the cash is changing hand in the month of july so why we are dividing the amount received in the no. of month i.e. 3 here.

1 Answer(s)


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Karan,
#1 - Hardware costs are typically capitalized and not shown as expenses in the same period they are bought. This is because once you buy a hardware it can be used for many users, so it wont be right to show it as an expense just for that 1 year. Same applies for software as well - the same software will be utilized for other projects as well over many years. In case the hardware or the software is specific to just this project and used only in that year and no more, then it could be included in COGS.

#2. In cash accounting entry has to be made when cash changes hands not in accrual accounting. In accrual accounting entry is made when the transaction is made irrespective of when the cash changes hands.

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