Do you have so many receipts on your desk that the sound of a fan creates a panic?
You can tame the paper tornado by learning how to organize your business expenses by category and by getting the right tools.
Before we dive into the specifics, let’s get into the reasons why you should track expenses in the first place.
Why Tracking Business Expenses is Important
Here’s a closer look at some of those benefits in action:
- Maximized tax deductions: As a small business owner, you can deduct expenses such as rent, business supplies, and employee benefits. Tracking each expense helps ensure you don’t miss deductions that can lower the tax you owe on your business income.
- Catching mistakes: Budget mistakes can happen, such as an employee who gets reimbursed twice for the same expense. Whether they occur by accident or on purpose, you’re better off catching them early so you can fix them and keep your accounting books accurate.
- More accurate budgeting: When you have an accurate picture of your spending, it’s easier to create reasonable budgets that can help you avoid future overspending and help you make a profit–which you can reinvest in the business to support long-term growth.
- Comply with the IRS: The IRS can ask you to prove your deductions with your receipts, and bank or credit card statements don't count. So staying organized and keeping track of every receipt is important.
So, how exactly do you go about categorizing and tracking expenses? Let’s see!
How Do You Categorize Company Expenses?
To categorize company expenses, start with the broad categories: cost of goods sold, operating expenses, and non-operating expenses.
- Cost of Goods Sold (COGS): Expenses directly tied to the production or acquisition of your products.
- Operating Expenses: All costs related to the regular running of the business except for cost of goods sold.
- Non-operating Expenses: Costs that aren’t directly related to the day-to-day running of your business.
But throwing your receipts into three shoeboxes with these labels still won’t help track your cash flow or make tax season much easier.
Let’s look at how to organize your business expenses in more detail.
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How Do You Keep Track of Multiple Business Expenses?
You can use detailed subcategories to keep track of multiple business expenses.
Here are examples of the most common categories for small business owners to track as part of cost of goods sold, operating expenses, and non-operating expenses.
Cost of Goods Sold
- Raw materials: Purchases of raw materials used to create your products.
- Inventory purchases: Items bought from manufacturers to sell to your customers.
- Packaging: Boxes, bags, and other packaging items used in storage and shipping.
- Rent: Rent for business properties such as office space and warehouses.
- Utilities: Includes expenses like gas, electricity, and water bills for your business.
- Salaries and wages: What you spend paying your employees. Hourly payroll software makes it easy to run payroll and keep track of related costs, including employment taxes and workers’ comp payments.
- Professional services: Payments to freelancers and contractors.
- Benefits: Costs from offering employee benefits, such as your contributions to employee healthcare or retirement plans.
- Business travel: Includes hotels, transportation, mileage, and meals while traveling.
- Property tax: The property tax you pay for any business properties you own.
- Business insurance: Includes professional liability, workers’ comp insurance, and insurance for business property and vehicles.
- Supplies: General office supplies, such as paper, pens, and printer ink.
- Education and training: Work-related education costs, including course fees, certification tests, and materials like books and videos.
- Communications: Business internet and phone bills.
- General repairs: Regular maintenance costs, such as oil changes for your business’s vehicles.
- Clothing: Job-specific clothing such as work uniforms or safety gear.
Selling, General & Administrative Expenses
Depending on how you organize your income statement, you may see another broad category called Selling, General, and Administrative (SG&A) expenses. Like operating costs, these aren’t directly related to producing goods or performing services.
While large companies often have a separate SG&A section on their income statement, small businesses generally list SG&A categories under operating expenses for simplicity.
- Marketing and advertising: Costs to promote your business, such as fees related to your website and payments for digital or traditional ads. You can also include the price of related software such as social media schedulers or email marketing platforms.
- Legal services: Fees for lawyers or legal experts. For example, you may hire a lawyer to review your employment contracts.
- HR: The costs of using HR software or hiring an HR expert.
- Accounting: Accounting software and service fees for a CPA or professional bookkeeper.
- IT: Software costs. You can record these as IT costs or in their respective categories, such as HR, Accounting or Marketing. Just make sure you only record the costs once.
Specific Categories of Non-Operating Expenses
- Interest: Interest paid on business loans.
- Income taxes: Taxes you pay on your business’s income.
- Depreciation: Represents the loss in value of your physical assets like vehicles and machinery over time.
- Amortization: Represents the loss in value of intangible assets over time, such as payments to the principal of a loan.
- One-offs: Unusual expenses not related to your regular operations. For example, lawsuit payments.
- Impairments: Drastic and unexpected loss of value in an asset. For example, if a tree falls in a storm and severely damages one of your business vehicles.
How Do You Organize Small Business Accounting?
You can organize small business accounting by using spreadsheets or accounting software. Keeping papers safely stored and using digital organization saves time and means you don’t have to worry about someone turning on a fan and scattering your stacks of invoices.
Organizing Business Expenses in Excel
Excel is often the first digital tool small businesses use for organizing business expenses and accounting.
To organize business expenses in Excel, create a new spreadsheet specifically for costs. Each row will represent a cost, and you can use columns like “date,” “description,” ”merchant,” “category,” and “cost” to fill in the details.
While those are the basic columns, you can add more to help you make sense of your spending, like:
- Payment method: Note whether you paid in cash, with your business debit or credit card, checking account withdrawal, or paper check.
- One-time vs. recurring: Is this a one-time cost or something that you regularly pay, like rent or utility bills?
You can use our template in Google Sheets to get started on your own. Just click “Make a copy” and go from there.
Organizing Business Expenses Using Accounting Software
When you’ve outgrown Excel and Google Sheets, accounting software providers like Quickbooks are usually the next step, and they come with expense-tracking features.
To organize business expenses using accounting software, you can connect it to your business credit card or bank account to automatically populate the information.
While each software differs, most let you create and edit spending categories and offer mobile apps that let you upload receipts to support your accounting records.
Tips for Tracking Your Small Business Expenses
Want to make your expense tracking easier and more accurate? If you said yes (and we hope you did), here are some tips on how to do it.
1. Choose One Accounting System
There are two types of accounting systems you can use to track business income and expenses. They are cash-based and accrual.
- Cash-based accounting uses the single-entry method, meaning that you record expenses on the day you pay them. This method is most useful when starting out as it’s easier to manage with spreadsheets.
- Accrual accounting uses a double-entry system, and it involves tracking expenses on the day you receive the product or service, even if you don’t pay for it then. Over time, accrual accounting gives you a more accurate picture of when your expenses occur.
As your business grows, you can work with a bookkeeper or accounting professional to determine if you should switch from cash-based to accrual accounting.
2. Open Separate Business Accounts
Separating your business and personal accounts makes record-keeping much easier. Use a business bank account and business credit card instead of using your personal accounts for business purposes.
This way, you know all the financial transactions in those accounts are connected to the business, and you don’t have to separate your personal expenses for tax purposes or when you prepare financial statements.
3. Categorize Expenses by Frequency
Another way to organize expenses is by how often you pay them, such as one-time or recurring.
One-time costs are those that don’t repeat regularly. These include most of your startup costs, like paying for permits or buying a building.
Recurring costs are expenses that repeat on a schedule, like weekly or annually. They include payroll, rent, routine marketing, and business insurance premiums.
Tracking these categories helps you predict future costs because you know which ones to expect again.
4. Keep Digital Copies of Receipts and Records
Thankfully, keeping paper receipts in filing cabinets (or shoeboxes) isn’t needed any longer. The IRS made it ok to keep digital copies for taxes back in 1997.
While nothing is stopping you from keeping the paper copies, organizing receipts digitally makes it easier to generate expense reports to track spending and send files to your bookkeeper during tax time.
Scan business receipts and save them on your computer and then upload those digital receipts to your accounting software.
According to the IRS, the general requirement for keeping business records (including receipts) is three years as long as you report all of your income and don’t file fraudulent returns or skip filing a return. Many tax professionals recommend keeping receipts for seven years in case something comes up.
Other business records to keep on file include:
- Vendor contracts
- Income tax returns
- Employee records, payroll records, and timesheets
- Business bank statements
- Permits and licenses
Holding on to these documents will make it easy to reference the information when you need it, and it helps keep you compliant with federal regulations. For added security, create a backup by storing copies in another location, like Google Drive.
Predict and Prepare for Upcoming Costs
You can categorize business expenses by their purpose using broad categories like cost of goods sold, operating expenses, and non-operating expenses. Specific categories, like rent or payroll, give you more detail about where your money goes.
Another way to look at expenses is by frequency, whether one-time or recurring. This helps you predict and prepare for upcoming costs.
Once you know how to categorize expenses, you can track them using spreadsheets or accounting software. All that’s left is to go forth and make sure all your business transactions get recorded.