SG&A expenses are a period’s cost of selling the product or service plus the cost of running the business as a whole, reported apart from the cost of what was sold. They are one part of a company’s operating cost, not all of it. The three words travel together because a US filing rule joins them in one prescribed caption, selling, general and administrative expenses, and the abbreviation is often typed without its ampersand.
Where the Caption Comes From
Regulation S-X indicates the line items which, if applicable, and except as otherwise permitted by the Commission, should appear on the face of the statements of comprehensive income, and selling, general and administrative expenses is caption 4 on that list (17 CFR 210.5-03). That is where the term’s fixed meaning actually lives. The caption is stated and nothing under it is broken out, so the rule fixes the label and the position rather than the contents.
The reach is narrower than the term’s popularity suggests. Those captions govern the statements companies file with the SEC, so a business that files nothing with the Commission sits outside the rule and captions its statement its own way. The full caption list and the two presentation formats are in the income statement, and the element every one of those captions reports is defined in expense.
What Separates the Selling From the General and Administrative
No US filing rule draws that internal line. The caption names the two halves and stops there, so the split runs on the ordinary meaning of the words and on the chart of accounts a company builds from them (17 CFR 210.5-03). A cost incurred to market the product or service and win a particular sale belongs to the selling half. A cost incurred to run the entity, whatever it happens to be selling that period, belongs to the other. Federal contract cost rules, which decide what a contractor may bill the government rather than how any statement is captioned, define the same two words along that line. Selling is a generic term encompassing all efforts to market the contractor’s products or services (48 CFR 31.205-38). General and administrative expense means any management, financial, and other expense which is incurred by or allocated to a business unit and which is for the general management and administration of the business unit as a whole (48 CFR 9904.410-30).
The caption is also narrower than a catch-all for everything below gross profit. Provision for doubtful accounts and notes has a caption of its own at caption 5 (17 CFR 210.5-03), so a charge for uncollectible receivables, worked through in bad debt expense, is given its own place beside the selling, general and administrative line on a filed statement rather than inside it.
SG&A Expenses Versus the Cost of Goods Sold
The separator is whether the cost attaches to what was sold. Costs and expenses applicable to sales and revenues sit at caption 2, which states the cost of tangible goods sold and the cost of services separately, and the selling, general and administrative caption sits two positions below it (17 CFR 210.5-03). The same section leaves one door open: merchandising organizations, both wholesale and retail, may include occupancy and buying costs under caption 2(a), and the room that creates is worked through in overhead.
On the books the same line is drawn by the inventory standard, which shuts selling costs out of inventory outright and treats general and administrative cost as a charge against the period apart from a narrow production-related exception, set out in period cost. So what a statement reports at caption 4 has already been charged against the period. Nothing sitting there is waiting for a unit to sell.
Where a Misclassification Lands
Coding a cost into the cost-of-sales caption rather than the selling, general and administrative one changes exactly one subtotal and leaves the rest of the statement alone. Say a service business’s quarter is drawn twice, once as coded and once with a single cost moved across that boundary.
As coded Reclassified
Revenue 2,000,000 2,000,000
Cost of services (1,200,000) (1,240,000)
Gross profit 800,000 760,000
Selling, general and
administrative expenses (500,000) (460,000)
Operating income 300,000 300,000Gross profit falls by the amount moved, and gross margin falls with it. Operating income does not move, because the amount left one line and joined another, and both of those lines sit above it. Net income does not move either. An error on this boundary therefore survives any review that checks only the bottom line, and it shows up in gross profit, in the gross margin, and in a year-over-year comparison of the two lines against each other.
The opposite boundary behaves differently. An item shifted between the selling, general and administrative caption and the non-operating captions changes operating income and leaves net income untouched, a case already set out in the equation for operating income. The staircase layout that puts both lines below gross profit in the first place is in multi-step income statement.
Common Questions
Advertising is a selling cost, because the spend is made to move the product or service rather than to produce it, and it heads the broad categories of selling activity the federal contract cost rule lists (48 CFR 31.205-38). The salaries of a sales force belong there too, as do the commissions that fall due when a deal closes, because both are incurred to win particular sales. A chief executive’s salary is general and administrative instead, and so is the salary of a controller, the officer who runs a company’s accounting function, because the entity carries both of them whatever it happens to sell in the period (48 CFR 9904.410-30). Rent on a corporate office, and the fees of outside counsel and outside auditors, sit on the same side, because they buy the capacity to operate rather than any one sale.
No official roster exists for the caption, so the account titles inside the line are set by each company rather than by a rule. The practical consequence is that two companies’ figures are not automatically comparable, because the same cost can sit inside the line at one and at a neighboring caption at the other.
No. It is a subset, and the filing rule’s own list is the proof. Other operating costs and expenses has its own caption 3 for material amounts not included at caption 2, and other general expenses at caption 6 catches items not normally included at caption 4 (17 CFR 210.5-03), the catch-all whose size threshold is worked through in sundries. Operating cost reported outside the selling, general and administrative line is contemplated by the rule itself. Operating expenses, meanwhile, is a grouping ordinary practice uses on a multi-step statement and not a prescribed caption at all.
Accountably places trained offshore accountants and tax preparers inside US CPA and EA firms, and a trial task lets a firm’s own reviewer grade real classification work before any client file moves.
