Effective bookkeeping is crucial for the success of any business. It involves tracking and recording all financial transactions, including expenses, to understand the company's financial health clearly.
While most entrepreneurs focus on recording their sales, tracking expenseas to maintain accurate financial records is equally important. Properly classifying expenses under different categories is also essential for efficient bookkeeping.
In this guide, we will provide an overview of recording expenses in bookkeeping and provide practical tips for entrepreneurs to maintain accurate financial records.
What are the expenses in bookkeeping?
When you are running a business, there are many things for which you spend money. All these are referred to as expenses. An expense is a cost involved in running a business so that you can earn revenue. Some of the examples of expenses a business incurs include:
- Building rent.
- Utility bills, including electricity, water, telephone, and internet.
- Purchase of equipment and maintenance.
- Marketing and advertising costs.
- Cost of transportation.
- Salaries, wages, commissions, incentives, and related costs.
- Merchant and bank fees.
- Shipping expenses.
Types of Expenses
The expenses you incur while operating your business can be classified under different heads or categories. You must categorize the expenses so they are correctly recorded. The information below will help you understand more about expense types and make it easy while recording expense.
Operating and Non-Operating Expenses
When expenses are classified, you can categorize them as operating or non-operating. Operating expenses are the costs incurred selling goods and services. Examples of operating expenses are rent, salaries, and marketing costs. It also includes general costs needed to run the business, such as research, travel, and IT expenses.
Non-operating expenses cannot be specifically linked to revenue from operations. For example, interest payment to the bank is unrelated to income. Similarly, inventory write-off is a non-operating expense.
Fixed and Variable Expenses
As the name itself suggests, fixed expenses do not change in value. The amount you need to spend remains the same for a particular period of time. For example, rent paid would usually be fixed for a year or more. Similarly, salaries are unlikely to change for at least a year or six months. These are fixed expenses whose value will not change.
Variable expenses are those whose value can change at any time. For example, the electricity bill depends on how much power you consume. It can vary depending on the season. E.g., using more heating during winter.
Businesses would need to borrow from lenders and creditors. Expenses related to this are termed financial expenses. Examples: Fee for loan origination, interest on the debt.
When you incur an expense but have not yet paid, it is termed accrued expense. For example, wages are incurred as work is done. But the payment is done at the end of the month.
Deductible and Non-Deductible Expenses
Deducting certain expenses from your gross income while calculating taxes is possible. Such expenses are called deductible expenses. All other expenses you cannot deduct are known as non-deductible. Deductible accounting expenses examples include travel expenses, advertising costs, insurance, office expenses, and utilities.
Expenses not paid for in cash directly are termed non-cash expenses. Example: Depreciation.
When you pay for an expense in advance, it is known as a prepaid expense. If you pay your rent in advance, it would be considered a prepaid expense.
Importance of recording expense
A question likely to arise in your mind is the importance of recording expenses. What would happen if you miss out on recording business expenses? The reasons you need to record expenses are listed below to answer your question:
- It helps you control your cash flow better.
- When you start recording all your expenses, you can track whether you are within budget.
- It helps you claim deductions while filing taxes.
- You can know how profitable your business is.
Expense allocation guidelines
- Identify the object to connect to a specific cost.
- You can accumulate all the costs related to the selected cost object. It is known as a cost pool.
- Decide the method to allocate costs. Depending on your business needs, you could choose proportional or activity-based allocation.
- Carry out the calculation as per the method chosen.
- Evaluate your method periodically and make adjustments if needed.
Expenses vs. Expenditure
Expenses are the costs incurred to get something of value. It is the amount you spend on goods and services. You incur expenses to run your business. The key concept involved here is that expenses help earn revenue for your company. E.g., You spend on advertising to increase sales.
Expenditure is an amount spent to purchase an asset or a service. It is classified either as capital or revenue expenditure. Capital expenditure is money paid to acquire assets (e.g., buying equipment). Revenue expenditure helps to fund business operations (e.g.: funds for research).
Expenses vs. Costs
A cost is an investment made to purchase an asset for the company. An expense is a regular payment made to help the business generate money. The purpose of a cost is to acquire an asset, while expenses help earn revenue. Expenses have a direct impact on profitability, while costs do not have a direct impact on profitability.
Costs are one-time payments, whereas expenses are recurring in nature. For example, buying machinery is a one-time activity, whereas paying building rent happens every month. Costs are shown in the balance sheet, while expenses are shown in the profit and loss statement.
Steps for recording expense
To record your expenses, you need to follow a systematic procedure. The steps involved in recording expenses answer your question on how to record expenses.
Keep them separate from your personal expenses.
The expenses you spend for your business differ from those incurred for your personal needs. Mixing up business and personal expenses is bad practice and must be avoided. Separate your business expenses from personal expenses.
Choose who will keep track of expenses and how.
It is crucial to decide who will do the work. You need a bookkeeper to track your expenses. You could do it yourself, meaning you have to devote a lot of time for this work daily. Using a software tool is an option, but you still need to record expenses in the software. You could also hire a bookkeeper or virtual assistant to complete your work.
Select accounting and bookkeeping procedures
There are different ways of bookkeeping. You could use either the single or double-entry system. In a single entry, you would record transactions only once. In double entry, you would record all transactions as debit or credit. It is the most common system followed. The other option is to record using an accrual basis, where you record expenses when it is billed. You can also choose the cash option, where you record expenses after making a payment.
Be sure to classify them correctly.
Expenses have to be appropriately classified or categorized. It will help you while analyzing your expenses. Most importantly, it would be helpful when you claim tax deductions.
Save your receipts.
Save receipts for payments, as the IRS requires you to keep records for three years.
Balance your bank accounts and expenses
Reconcile the expenses you have recorded by tallying them with your bank account. It ensures you can spot any errors and rectify them.
Ensure you don't overlook any typical small business expenses.
You have to record every single expense incurred. If you buy a pen, you may not feel it is important to record it. But it is an expense for your business and must be recorded to help you claim deductions later.
Make recording expenses a habit
Make it a habit to record expenses as per a schedule. It will ensure you don’t miss out on anything and keep your books up to date.
How to record expenses efficiently?
Recording expenses accurately is a key function in bookkeeping. As a business owner, there are many other things you need to do rather than spend time recording expenses. At the same time, appointing a full-time bookkeeper can be expensive. The solution, therefore, is to hire a virtual assistant to help you with your bookkeeping. It is a cost-effective way to ensure that recording expense is done seamlessly.
Benefits of a virtual bookkeeper
A virtual bookkeeping assistant does not sit in your office but works remotely. The benefit is that you don’t have to set aside space in your premises and allot resources. The charges you pay depend on the work you have. As a result, you will be spending much less when compared to hiring a full-time bookkeeper.
A virtual bookkeeper can help you with all your bookkeeping work and ensure an up-to-date book of accounts. It helps you ensure that financial reports are accurate and no key activity is missed. Most importantly, you can focus on your core work of growing your business.
Wishup: recording business expenses effectively!
Wishup allows you to hire virtual assistants for your business to help you with your routine work. You can hire a virtual bookkeeper who is experienced and competent in bookkeeping. The benefits of working with Wishup are listed below.
Get a streamlined hiring process
When you work with Wishup, the hiring process is streamlined. You don’t have to worry about interviewing candidates. Wishup will allot an experienced and highly skilled bookkeeper to handle your work virtually.
Your expenses are in the safest hands
Wishup’s online bookkeeping services ensures you get a top-quality virtual bookkeepers. Only the top 1% of applicants are hired by Wishup. They undergo training before being deployed for work, thereby ensuring your expenses are in the safest hands.
Your data is secured
When you work with Wishup, you can be assured of data security. You can ask the virtual bookkeeper to sign a non-disclosure agreement.
Your satisfaction is our foremost priority
Wishup puts client satisfaction above everything else. If you don’t like the virtual bookkeeper assigned, you can ask for an instant replacement.
Test out your VA with the seven-day risk-free trial
Before hiring a virtual assistant, you can get a 7-day risk-free trial of their services. It would help you know how they work and whether you would get along with them well. If you decide the services are not for you, don’t worry, we promise you’ll get your money back.
Recording business expenses is an important part of bookkeeping. It would allow you to run your business efficiently since the expense data will help you when you carry out an analysis. The guide outlined how you can carry out the process of recording expenses as best as possible. For recording your business income and expenses, you need a bookkeeper.
Hiring a virtual bookkeeper from Wishup is a great idea. It allows you to get your bookkeeping done in the most efficient way while saving money. Wishup’s focus on quality ensures you will get the best results from your virtual assistant. You can schedule a free consultation today to get more information. Alternatively, you can send a mail to [email protected] and share your specific requirements.
FAQs about recording expense
What are the 4 types of expenses?
The four key types of expenses are:
- Fixed and variable expenses.
- Operating and non-operating expenses.
- Deductible and non-deductible expenses.
- Financial and non-cash expenses
Why do we record expenses?
When you record all the expenses incurred, you are ensuring you get a complete picture of your finances. It would help you understand how you are spending money. Most importantly, it helps you understand your profitability.
Where are expenses recorded in accounting?
The details of all expenses are recorded in the expense account in your income statement.
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