Dictionary / Overhead
What does Overhead mean in accounting?
Quick definition
Inventory & costingAny cost of doing business other than a direct cost of an output of product or service. This term guides how bookkeepers record, classify, and explain related transactions in routine financial reporting.
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Examples
Shop power and office rent stay off the job
You run a window shop. On January 12, the electric company bills $286 for shop heat and lights, and the landlord bills $1,900 for the office next to the shop. Neither bill is glass, a sash, or a crew hour on a residence install. Enter both bills in QuickBooks Online or Xero to utilities and rent, not to that job. Those lines are overhead: costs of staying open, not a direct cost of one output, and you will see them on the January P&L as period expense.
Custom acrylic is not shop overhead
You run a picture-framing shop. On June 6 you buy $340 of cut-to-size acrylic from a plastics supplier for a gallery show. Someone codes that supplier's bill to Shop overhead because the sheet was used in the shop. That acrylic belongs to one client's frames; it is a direct cost of that job, not a cost of doing business generally. Recode the $340 in QuickBooks Online or Xero to job materials on that gallery so every other frame job does not subsidize one gallery's glass.
Why it matters
Overhead is every cost of staying in business that is not a direct cost of one product, job, or service. You will sort this on most vendor bills and bank-feed lines if you track jobs or products; even a shop that never codes to a customer still has it, sitting as period expense. Dump a job's materials or crew time into this bucket and that job looks cheaper than it was while the P&L overhead line swells. An overhead pool is the grouped bucket you later spread, an overhead rate is the allocation math, and manufacturing expenses is factory-only spend that already excludes materials and labor; this word is the broader label for shop and office alike.
Further reading
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What is Overhead in bookkeeping?
Any cost of doing business other than a direct cost of an output of product or service.
When should I use Overhead?
Use Overhead when the transaction facts match its definition and you need the ledger and financial statements to reflect the correct account and period.
What is a common mistake with Overhead?
Overhead is used for overhead entries, while Offset covers a related but distinct bookkeeping purpose. Review both terms before posting unusual transactions. A common mistake is applying it by label only instead of checking the underlying transaction details.