How To - Classify Business Costs

Business costs are classified under 2 main groups:

  1. Capital costings. These are costs, which have an effect on a business over a period of time. For example, the cost of land, buildings, equipment, vehicles, loans etc.

  2. Operating costs. These costs are necessary for the day-to-day operation of the business. For example the costs of goods purchased, cost of materials, rent, telephone, advertising, salaries, etc.

The important difference between these two groups is that operating costs are involved and incurred in a particular period and matched against the revenue generated in that same period, to work out the profit and loss for that period.

Capital costs however are incurred in that period also, but they do not directly affect the calculation of the profit and loss of the business. In short, capital costs relate to expenditure made for the long-term purchases (i.e. capital), which cannot be reduced or sold quickly.

Operating costs, however, relate to expenditure necessary to keep the business running on a day-to-day basis and they are further divided into fixed costs and variable costs....

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