A business owner must make sure to keep track of business expenses. One that does well needs to be able to handle hundreds of transactions effectively and deduct some of the expenses.
Some businesses don't even make enough money to pay for their own expenses (for example, wages, rent, and inventory costs). A survey found that from 2019 to 2021, the number of businesses that seek funds for operating costs rather than expansion grew from 43% to 62%.
You can pay bills and loans, make payroll, and plan for the future if you keep proper business records. This article discusses five easy steps for tracking expenses.
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What is a Business Expense and Why Does it Matter?
Tracking business expenses properly is part of the bookkeeping process. Any cost incurred by your business can be a business expense.
Some common business expenses can be the fee for labor, supplies, software, and more.
Tracking business expenses is important since it can help avoid financial problems. It also simplifies tax seasons and keeps you on top of your overall finance management.
How to Keep Track Of Business Expenses In 5 Easy Steps
Step 1: Open a business bank account
As a new business owner, you will need to open a business bank account. Once that account is operational, it should be used exclusively for business expenses. Having a separate business account makes tracking expenses easier.
Step 2: Use a business credit card
Small firms can use a business credit card to make major purchases even if the money isn't yet available. For businesses, this means more capital to invest toward growth or a higher credit limit if they don't need it instantly.
Step 3: Choose cash or accrual accounting.
Cash and accrual accounting show income and expenses differently. Every business must choose one of two methods to make its accounting consistent for tax purposes. Growing companies use accrual accounting more likely. This accounting method uses generally accepted accounting principles (GAAP), which are more in-depth. With accrual accounting, income is recorded when a product is sold rather than when it is paid for. Similarly, expenses are recorded when the bill is received, not when it is paid. Accrual accounting uses double-entry bookkeeping and is more accurate and detailed.
Cash accounting is more user-friendly, hence small enterprises adopt it. The process is simple: when payments and income occur, you record them.
Step 4: Consider accounting software
Accounting software automates your expenses. These software systems make it easy to track financial transactions from vendors such as invoices, rent payments, and even wages. They also reduce the efforts to track expenses and improve the book's accuracy.
Step 5: Manage receipts properly
All expenses need to be recorded. One way to do this is to break down a business's source documents into categories. Then you can organize them by expense item and date of purchase. When it comes to the yearly tax, you can have all the necessary information to do tax or to look up any previous expenses if needed.
The receipts can also be digitized. Use a receipt scanner to take digital images of your receipts, which may then be filed away in your accounting system. You'll have all the proof you need for tax deductions, and all your records will be safe and sound online in case you get audited.
What Is the Most Effective Way to Keep Track of Expenses for a Small Business?
Every small firm must engage in bookkeeping as a means of recording all transactions in order to precisely manage expenses. A small business can keep its books manually. Collecting and entering all expense documentation, like invoices and receipts, into Excel sheets. These figures are collected to provide financial reports. Then, these reports will subsequently be sent to business owners in order for them to make prudent financial decisions.
Using accounting software as an income and expense tracker, the steps above can be done automatically.
There are many ways to do bookkeeping well, depending on the type of business. Some businesses may also choose to outsource their bookkeeping so that all of their numbers and receipts are taken care of. This is even better because everything can be done smoothly without having to pay more than you would for an in-house bookkeeper.
These are five simple steps to keep track of business expenses, whether you are new to the market or your company is thriving. Open a company expense account, use a business credit card, pick cash or accrual accounting, and manage receipts. These steps are very important to the bookkeeping process. You can dive right in and learn how to do bookkeeping right, or you can hire a professional. In either case, make sure you will visit our bookkeeping services where dedicated bookkeepers are ready to help.
With Irvine Bookkeeping, keeping track of business expenses is a lot less painful.
If you'd like to focus on growing your business rather than worrying about the books, schedule a free call with IB Team and let our experienced team focus on your financial management needs.