Expense Classification is all about understanding where your business is spending its money.
When transactions are added to your accounting software, different types of expenses will be mixed together. For example, any advertising payments will be mixed in with rent or lease payments; this makes it difficult to see the bigger picture of your business’s spending habits.
As part of our accounting process, we regularly work through all of your transactions to categorize your expenses into meaningful groups based on their purpose.
Do you know how much you’re spending on marketing every month? What about packaging or ingredients? How much are you spending each year on one-off major purchases, like new equipment?
There are three critical reasons you need this data:
- To fully understand your business’s spending habits.
- To get a better idea of the returns on your investments.
- To be prepared for tax time.
When you think about your business’s spending habits, do you know where the majority of your money is going — or can you only guess? Small transactions, especially, can add up to a larger monthly or annual cost than you might expect. Breaking your expenses into relevant categories can give you an actual, unbiased view of where your money is being spent.
Additionally, this categorization process can make it easier for you to see how your investments are working. For example, take a varying cost, like social media ads. Perhaps you “boost” a post every few weeks. Do you know whether that ad spend is turning into revenue? Expense classifications can better help you see how much money you’re investing, and when, into things like advertisements so that you can compare them to your cashflow.
Finally, expense classifications are crucial come tax time. Regularly classifying your expenses ensure that they are accurately recorded and properly accounted for on your tax return — and since they’re already divided into meaningful categories, you’re more easily able to determine which are tax-deductible and which are not.
Overall, this may seem like a basic responsibility in accounting, but it is one of the most important foundational elements to keeping clean, accurate books.
At Anne Napolitano Consulting, we work on your books consistently to ensure your transactions are always up-to-date: