Expenses fall into two basic categories. The first expense category is cost of goods sold (COGS) or cost of services (COS). It includes all the costs directly involved in producing a product or delivering a service. The second expense category is operating expenses. Operating expenses are the costs that are required to keep the business going day to day. Both of these categories of expenses are distinguished from capital expenditures, which are the cost of items considered long-term investments, such as computer systems and equipment. Capital expenditures are not found on the income statement (except for the associated depreciation; they are accounted for on the balance sheet as an asset).
In this sample income statement, you can see how various types of expenses are subtracted from revenues to determine net profit. Amounts shown in thousands.
(Excerpts from Financial Intelligence, Chapter 8 – Costs and Expenses)
The accounting department has to make decisions about what (expenses are) “above the line” and what’s “below the line.” The “line” generally refers to gross profit. Above that line on the income statement, typically, are sales and COGS or COS. Below the line are operating expenses, interest, and taxes. What’s the difference? Items listed above the line tend to vary more (in the short term) than many of those below the line, and so tend to get more managerial attention.