What Goes into Selling Costs
Selling costs include just what you would expect: any expense involved in selling your products or services that tie in directly with sales. For example, sales commissions would count as a selling cost, as would shopping bags and delivery charges (when you deliver something to your customers). Those types of costs don't exist without sales, so they vary directly with your sales.
Other types of selling costs, such as advertising and promotions, are not dependent on sales. Rather, the opposite is true: you hope that spending more on advertising and promotion will drive up your sales. Even though the connection is not as clearly defined, it does exist, making these types of expenses part of selling costs as well.
There is no accounting rule that requires you to split out your selling costs. If they don't make up a large part of your total expenses, you can leave them in with your general expenses. However, if they are high enough for you to want to track them separately, you can make a selling costs category within your general expenses.
When you choose to highlight your selling costs separately, they will be the first expenses listed on your statement of profit and loss. That's because they are more closely linked to sales than are your other expenses, so they appear on the statement closer to the revenue section.
Direct Selling Costs
Selling costs take two forms, direct (or variable) and indirect (or fixed).
Direct sales costs come into play only when a sale takes place. For instance, shopping bags are a common selling expense, but you would not incur this expense unless you sold something to put into that shopping bag. The sale drives the expense.
Examples of direct selling costs include:
Gift boxes and wrapping
Indirect Selling Costs
Indirect selling costs are those expenses that are necessary to generate sales but do not vary based on sales. You have to pay these expenses even if you don't sell a single thing. However, it can be pretty hard to generate sales without them, making them well worth the cost.
The most common indirect selling costs include sales salaries, advertising expenses, promotional costs, and travel. Essentially, any cost you incur while trying to convince customers to buy your product can count in this expense category. You may include meals and entertainment here as well; many business owners take clients and potential clients to lunch, or conduct business over golf. Be aware, though, that these particular expenses (the meals and entertainment) are not 100 percent deductible for tax purposes.
Don't confuse sales salaries with sales commissions. Sales salaries are paid to the sales staff regularly, regardless of whether they generate sales or how much they sell. Commissions are paid only when a sale has been made: no sales means no commissions.
Be careful, too, not to go overboard with the mostly social expenses. This is an area more closely monitored by the IRS than others, because there can be a fine line between the personal and the business aspects of these expenses. While traveling to Hawaii to meet with a store owner who may begin stocking your sunglasses counts as business travel, staying an extra two weeks and bringing the whole family along does not.