Last editedJun 20222 min read
Business expenses are an essential part of general accounting, appearing on the company’s income statement where they’re subtracted from revenue to calculate net income. Yet tracking expenses is also crucial for setting budgets and managing company cash flow. Creating organized business expense categories makes effective management more efficient, so here’s how to get started.
What are business expenses categories?
There’s no strict expenses list for businesses that all companies must follow. However, dividing your business expenses into separate sets of categories helps your company stay organized. It breaks expenses into lists of deductible and non-deductible categories, assisting bookkeepers and accountants. Some categories are industry-specific, while others relate to departments and internal codes.
Common types of business spending categories
You can adapt this list to best suit your own business needs, but here are common expense categories to consider:
Rent: Covers the cost of office space, retail, or commercial premises
Payroll: Covers the cost of employee salaries
Taxes: Covers the cost of tax paid on profit and payroll
Fuel and mileage: Covers the cost of company transportation
Utilities: A breakdown of utility expenses including internet, electricity, heating, and water
Advertising/Marketing: How much do you spend on online and traditional marketing?
Software subscriptions: Most businesses have multiple subscriptions with recurring cost
Website maintenance: This category can also include server costs
Travel and entertainment: This category applies if your business involves in-person visits with clients
Machinery and equipment: Covers larger purchases of office or warehouse machinery
Office supplies: Covers smaller, ongoing costs like stationery and printer ink
This list is far from comprehensive; your company might also have separate categories for consultants, training, employee benefits, and others.
Which categories are tax-deductible?
We’ve listed a few of the most common expense categories, but which ones can be written off on your tax return? You’ll want to look at the IRS website for specifics – specifically Publication 535.
Generally, any ordinary expenses incurred during the pursuit of profit qualify as a business expense. The IRS doesn’t allow hobby-related costs to be deducted, but most everyday business categories will qualify if they’re:
Necessary for the business to function
Can be backed up with receipts
How to categorize your expenses
Even if you run a very small, home-based business, it pays to be organized. While you can wait until the end of the accounting period to categorize your expenses one by one, it’s better to set up categories in advance. That way, you can automatically insert each receipt into the appropriate category to see where your money is going.
Consistency is key. Get started by creating categories that your business uses most frequently. You can take a look at your income statement for assistance with this task. The next step is to review all accounts on a regular basis, reconciling bank statements to ensure that all expenses make their way to the appropriate categories.
Ideally, tracking expenses takes place at the point of payment. Accounting software makes short work of this, digitizing expense receipts for instant categorization. This gives the finance team real-time access to all business expenses categories, so they can track who’s spending what without extensive filing.
Another benefit of using accounting software is that it gives you real-time access to expense data. This helps with creating profit and loss reports and generating additional financial statements. It also assists with budget-setting and sticking to smarter goals.
There’s a wealth of accounting software to choose from, including providers like Salesforce, Xero, and Chargebee. Each makes it easy to set up the categories that best suit your business. Compare accepted integrations for best results. Most are easy to integrate with other elements of your accounts, like collecting payments. GoCardless integrates with over 300 partners, including those mentioned above. This ensures expense tracking, accounting, and payment collection go hand in hand for a joined-up workflow.
We can help
GoCardless is a global payments solution that helps you automate payment collection, cutting down on the amount of financial admin your team needs to deal with. Find out how GoCardless can help you with one-off or recurring payments.