Accounting Treatment of Direct Expenses

In cost accounting, direct expenses are the part of prime cost. For calculating the prime cost, we add direct material cost, direct labor cost and direct expenses. Before understanding the accounting treatment of direct expenses, once again, you should understand direct expenses.


When any cost easily can be identified from finished goods, it will be direct cost. direct expenses are the part of direct cost. For example Freight Carriage inward, factory expenses, oil and fuel, factory fixed assets' depreciation, Royalty on production, Import duty, Excise duty and Clearing and Port Charges.One of other good feature of direct expenses, it changes directly, if there is the changing in the production.


Following it its accounting treatment.

1. When direct expenses are paid.

Direct expenses account Dr.

Cash/Bank Account Cr.
2. When we we show it in the financial statements.

Trading Account Dr.

Direct Expenses Account Cr.
3. When there are direct expenses which are due but not paid in the end of the period and not recorded in the books of accounts.

Direct Expenses Account Dr.

Outstanding Direct Expenses Account Cr.


In Financial Statement


1. All direct expenses will be debit in trading account. All outstanding direct expenses will be added in paid direct expenses.

2. All outstanding direct expenses will be shown in the current liability side of balance sheet.

For Calculation the Cost of Production and Cost of Goods Sold

For calculating cost of production, we will add direct material, direct labor cost and direct expenses or manufacturing overhead and then deduct cost of closing stock of raw material, work-in-process. For calculating cost of goods sold, we add opening stock of finished goods, purchase of finished goods from outside, cost of production and deduct closing stock of finished goods.