Question

In financial accounting, which items are considered operating expenses when calculating net income?

a) Rent and Salaries for each year
b) Annual Depreciation charge for machinery each year
c) Bad debts written off in Year 1
d) Provision for Bad and Doubtful Debts for Year 1

Answer 1

Operating expenses in financial accounting include daily operation costs like rent and salaries, annual depreciation of machinery, and bad debts written off. Provisions for bad debts, while related, are future estimations and not direct expenses.

Step-by-step explanation:

In financial accounting, operating expenses are the costs required to maintain a company's day-to-day activities. These expenses include items such as rent and salaries for each year, which are essential for daily operations. Other examples are the annual depreciation charge for machinery each year, since it represents the usage and wear of equipment over time related to generating revenue. Meanwhile, bad debts written off in Year 1 also qualify as operating expenses, as these costs arise from the normal credit sale operations. However, making a provision for Bad and Doubtful Debts for Year 1 is a bit different; it represents an estimation of potential future losses, rather than an actual expense incurred during the year for operations.