In accounting, general and administrative expenses represent the necessary costs to maintain a company's daily operations and administer its business, but these costs are not directly attributable to the production of goods and services. Information on this type of expense is especially useful when calculating a company's fixed costs. Typical items included in the general and administrative expenses are accounting staff salaries, building rent, executives wages and benefits, depreciation on office fixtures and equipment, and insurance, as well as legal counsel salaries, various office supplies, accounting and tax fees, legal fees, and electricity and water bills.
General and Administrative Expenses
General and administrative expenses typically refer to expenses that are still incurred by a company, regardless of whether the company produces or sells anything. This type of expense is shown on the income statement, typically below the cost of goods sold (COGS) and lumped with selling expenses, forming a selling, general and administrative expense line item.
Typically, any cost that does not link to the production or selling process and is not part of research and development is classified as a general and administrative expense. For instance, a public company must hire external auditors to audit its financial statements and footnotes on a regular basis. An audit fee is typically not associated with a production process, but this cost is still incurred regardless of whether a company produces anything or not. Audit fees, along with expenses of a similar nature, such as rent, electricity, insurance and office supplies, are put into the general and administrative expense account.
Cost Reduction Incentive
Because they do not directly contribute to sales or production, there is a strong incentive on the part of management to lower a company's general and administrative expenses. However, since these costs are typically fixed, there is a limited scope in a company's ability to reduce them.
Companies that have a centralized management tend to have higher general and administrative expenses. Decentralizing and delegating certain functions to subsidiaries can significantly lower general oversight expenses.