Running a small business isn’t easy—and keeping up with everyday accounting responsibilities can become challenging if your business hasn’t implemented a solid system for tracking small business expenses.
In this article, we’ll define business expenses, then touch on a few key steps to keeping track of business expenses, including opening a business bank account, selecting accounting software, and setting standards for how your business submits, documents, and audits expenses.
What are small business expenses?
A business expense is any operating cost your business incurred. Sometimes referred to as “business deductions,” these expenses are subtracted from your company’s revenue to determine both your business’s profits and taxable income.
Examples of “ordinary and necessary” business expenses include:
- Office supplies
- Advertising and marketing costs
- Bank commissions and fees
- Utilities, rent, and software
- Essential business travel
Since business expenses directly impact your company’s tax liability, you must accurately track, document, and archive proof of these costs. A good accountant can help you determine whether a purchase is a business expense and how to categorize it properly.
Keep in mind that some long-term, depreciating assets—such as furniture and technology—will need to be expensed and tracked carefully. That’s because investments such as these are “expensed” as they lose value over time instead of all at once.
Related: How to Register a Small Business
How to keep track of expenses
To accurately and regularly track the expenses your business incurs, you’ll want to follow these three steps:
1. Start using a dedicated business account
One of the easiest, cleanest ways to make your bookkeeping more efficient is to use a dedicated business checking account for all business transactions. This is true even if you’re a sole proprietor. You may also wish to open a business savings account and—if you accept payments via credit card—a merchant services account.
You’ll also need a business debit card linked to your new bank account. If you prefer to use a credit card for business expenses, open one under your business’s name using its employer identification number (EIN). While you can technically expense transactions charged to any credit card, you’ll save time, money, and stress by using a separate, business-only debit or credit card for all business expenses.
2. Find accounting software or hire an accountant
While a small business can technically track its expenses manually, most businesses rely on accounting software, a part-time or by-the-hour accountant, or both to keep their books perfect. Choose accounting software that you’re confident you can learn to use and that can help you quickly categorize business expenses.
Once you’ve chosen a solution, link your accounting software to your bank accounts and credit cards. Simply by connecting your software to your financial institution’s website, you’ll enjoy instant visibility into your company’s transactions.
You’ll also need to decide how and when to record income and expenses. Talk to your accountant about whether a cash or accrual accounting methodology is better for your business. The former bookkeeping strategy emphasizes a business’s cash flow, whereas the latter tracks all bills submitted and sent out, even if they’re not yet settled.
Note that the IRS prevents some businesses from utilizing cash-basis accounting.
3. Create a standard procedure for tracking expenses
Once your software is set up and you’ve settled on an accounting method, carve out a standard operating procedure for tracking small business expenses. Even if the only people touching your business’s books are you and your accountant, you should detail precisely how to track all expenses in an official document. Your SOP should articulate the following:
- How expenses are submitted and when
- What documentation is required for every business expense
- How expenses are categorized
- What to do if an expense is unusual or requires more attention
Remember that most accounting software can help simplify and speed up this process. Ideally, every debit or credit card transaction will automatically appear on your accounting software’s dashboard. From there, you should be able to open up a given transaction, categorize it quickly, and attach a receipt or paid invoice to that line item. Many modern accounting software solutions also sync with business expense tracking apps or offer a proprietary app that simplifies this, too.
While your business could technically scan every last receipt manually, these automated solutions make it much easier to connect transactions, snap quick photos of receipts, and bulk-categorize common expenses. Still, no matter how intuitive your accounting software is, your business should detail precisely how it wants each expense filed.
Another thing to keep in mind? The IRS has its own requirements for businesses that claim expenses. You’ll need to keep paper receipts, bank statements, and similar documentation for at least three years—even if your accounting software is maintained perfectly. Your SOP should issue guidance on these requirements as well.
4. Regularly audit your books—and that SOP
Whether your small business has just a few expenses every month or thousands, it’s essential that both your accountant and a second set of eyes review books carefully from time to time. How frequently these audits must occur depends on your risk tolerance, the volume of business expenses, and the size of those transactions. At the very least, commit to reviewing all transactions before closing each accounting period.
If something doesn’t seem quite right, investigate further. And if your business expense tracking strategy or accounting software appears to be falling short, don’t be afraid to make a change.
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