Wondering how to organize your small business expenses? These categories can help you budget and analyze your performance as well as make tax time easier.
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by LegalZoom staff
Updated on: February 12, 2024 · 8 min read
Every business owner must report their business expenses to the Internal Revenue Service (IRS), so keeping track of them is paramount. Here are the most common types of small business expenses and seven foolproof tips to help you easily manage them.
If you want to organize your business expenses, first, you'll need a bank account for those transactions.
A business bank account is your go-to destination for all business-related transactions to keep things organized. You should never use your business account for personal expenses or vice versa.
For a better understanding of how your business spends money, categorize your small business expenses by how often they occur. Starting a business takes lots of upfront cash compared with the long-term costs of running the business, and knowing which expenses fall into which category can help you look ahead.
There are two primary types of expenses: One-time expenses only occur once and usually involve startup costs like permits, licenses, and fees. They can also include high costs like furniture and heavy equipment that isn't replenished regularly. Recurring expenses occur regularly, and you should account for paying them monthly. Common recurring expenses include rent, payroll, utilities, and small office supplies.
No matter which accounting method you choose for your business, it would help if you made a regular habit of saving and digitizing your receipts and records. Receipts are your only proof of legitimacy for business expenses when it comes time to file your small business taxes, and receipts can easily fade.
Make sure you scan or take pictures of your receipts to avoid missing out on tax deductions before filing. In addition, you should aim to make digital copies of important documents related to your business, including:
A digital record of necessary business information can be much easier to access than digging through a filing cabinet.
If your business has grown to the point where a spreadsheet is no longer easy to maintain, consider switching to accounting software to automate the process. Accounting software can connect automatically with your business banking account to record and categorize transactions so you never miss a beat. LZ Books is an accounting software solution that auto-categorizes income and expenses into tax-ready categories, plus makes it simple to export data for your tax preparer.
A spreadsheet can help you learn the ins and outs of simple business bookkeeping by familiarizing you with your business' expenses. Spreadsheets help you manually record transactions regularly and categorize them with filters, tags, or formatting.
Consistency is key when organizing your business expenses, and that applies to the accounting method you choose, too.
As a small business owner, you can choose to keep track of transaction payments, or once a service or sale is complete. Each method offers different benefits: Cash-based accounting records transactions once you send or receive a payment. It's a more simple method to manage for smaller businesses. Accrual accounting records transactions once a service or sale is complete. This method gives a complete picture of business financials.
It means nothing to organize your small business expenses if you don't protect yourself and your business with business insurance or liability protection through your business entity. When you start a new LLC or form an S corporation, these entities also shield your personal assets from liability if you run into legal issues through your business.
The key to organizing small business expenses is placing them in the right categories. These categories can help you budget and analyze your business' performance. It will also make it easier to identify expenses that qualify for tax deductions or credits quickly.
On an income statement, you separate expenses into broader categories and then subdivide those into more specific categories. The broadest categories for expenses are:
Operating expenses: Most common. Include expenses incurred during the regular course of business.
You may find another broad category on the income statement within operating expenses: Selling, general, and administrative (SG&A) expenses. SG&A expenses include all costs not directly related to the production of a good or the performance of a service, like:
Rent, utilities, and supplies not directly used in producing a good are also included in SG&A.
Non-operating expenses: Incurred through an activity unrelated to the business' core operations.
While operating expenses are more common, most businesses also have non-operating expenses. Common examples of non-operating expenses include:
The general ledger is the core of a business' accounting record-keeping and where you record all financial transactions and subdivide expenses into their most basic elements. You can use this ledger to generate the business' financial statements, including the income statement.
These are some of the most common specific categories for expenses:
There are many categories and subcategories of expenses. Your industry and specific business needs will help you identify which expense categories are necessary and useful to track and analyze.
You can't run your business efficiently or effectively without staying organized, and you shouldn't head into tax season without organizing your business expenses.
When it comes time to put your organization to the test and file an annual report for your business, it can help to speak with a qualified attorney who can ensure you put your best foot forward.
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