How to calculate total expenses?
Before calculating total expenses, it is critical to know the difference between revenue and income. Revenue is the money earned after selling products or services before paying expenses. Income refers to total profits (net income) after subtracting expenses from revenue.
Below is a simple way of calculating total expenses from revenue, owner's equity, and income:
- Net income = End equity - Beginning equity (from the balance sheet)
- Total Expenses = Net Revenue - Net Income
If the result is positive, the revenue is more than expenses, making a profit. Conversely, if the number is negative, the company makes a loss because its expenses are more than total revenue.
Example 1: A company's equity grows from $200,000 to $800,000. Its total revenue recorded is $1,200,000. What are its total expenses?
- Net income = $800,000 - $200,000 = $600,000
- Total expenses = $1,000,000 - $ 600,000 = $400,000
The challenge comes in if other factors affect the owner's equity section. These include:
- A profit or loss
- Distribution to shareholders through cash dividends
- Raising new equity capital such as issuing shares or purchasing treasury stock
Example 2: A company had total revenues amounting to $800,000. It also had the following information in its equity section of the balance sheet: equity grew from $750,000 to $1.2 million, it paid $50,000 in cash dividends, and issued shares worth $150,000. Calculate its total expenses:
- Net income = [$1,200,000 (ending equity) + $50,000 (dividends paid)] - [$750,000 (beginning equity) + $150,000 (shares issued)] = $350,000
- Total expenses = $800,000 - $350,000 = $450,000
The formula above is helpful for reverse engineering a company's total expenses. However, a detailed breakdown of expenses throughout the accounting period is an invaluable management tool that can help track and cut costs, inform budget decisions, and support project growth.