Running your small business can seem overwhelming, from finding new customers to properly categorizing your expenses. Expense classification is important not only to provide you with accurate numbers to base your decisions on, but also because this information gets filed on your tax returns.

Opening a business bank account, utilizing a software program, creating a chart of accounts, and frequently reviewing transactions are four methods that can help you categorize expenses for your small business.

Open a Business Bank Account

A business bank account is vital to separate your personal and business liability, but it can also assist you with expense classification. When all transactions are run through a single account, you can ensure completeness in your accounting function. This leads to reporting accurate amounts on your tax returns and financial statements.

Additionally, when you have a single bank account that houses your business transactions, you will receive monthly statements that can help you identify what the charges were for. How often do you really keep receipts? A bank statement can serve as your receipt and assist in the categorization process.

Utilize a Software Program

Working alongside a business bank account is an accounting software program. Most software programs seamlessly integrate with your bank, allowing transactions to automatically flow through without manual entry. In addition, you can set rules for transactions, telling your accounting software program to automatically categorize transactions under the same vendor. This promotes consistency.

Instead of trying to keep track of your business expenses on an excel sheet or on paper, an accounting system significantly reduces your data entry burden. Moreover, software programs can aid in the classification process by suggesting categories.

Create a Chart of Accounts

Within your software program, you should have an accurate chart of accounts set up. A chart of accounts is a listing of all the income, expense, asset, and liability accounts that your business has. For each set of expenses, you should have a chart of account listing. For example, there should be an account number for each revenue stream.

The chart of accounts listing will help you classify transactions as you can clearly see the different income and expense accounts you hold transactions in. Don’t be afraid to set up additional accounts if you notice a new expense type, such as business meals and employee meals.

Frequently Review Transactions

Another way to categorize your business expenses is to frequently review transactions. Your accounting system relies on you to make necessary changes to classifications. Review each transaction on a monthly basis. This can be done by utilizing the general ledger report, which outlines every expense within each chart of account listing.

Summary

Categorizing expenses for your small business is vital to promote growth and long-term success. Making an important business decision based on incorrect information can be detrimental to your operating and financial goals. To uncover classification strategies tailored to your business, reach out to Online Accountant.

We prepare CPA compliant compilation year end financial statements, offer full bookkeeping services on all leading accounting software platforms, personal and corporate income taxes, or GST/HST and provincial sales taxes. In short, we do it all! No matter what province or territory you reside in. Please contact us with any question you may have regarding our services. Our goal is to answer your concerns within one business day.