Every business is faced with expenses. But some businesses don’t consider the expenses in the profit calculation of the business. This may result in inaccurate profit and may lead to business loss. As a small business owner, you focus on client satisfaction as well as producing quality goods and services. Some expenses may occur because of this.
Monitoring, categorising, and reviewing the expenses are the three crucial steps of calculating profitability by taking expenses into account. Categorizing these expenses helps in identifying the tax-deductible expenses and ensuring a smooth cash flow for the business.
If you have no idea about categorizing all the expenses, then this blog is for you. This blog guides you about expense categorization.
At first, you should know about deductible expenses and non-deductible expenses. The deductible expenses are the expenses that are subtracted from the gross income to reduce the tax amount owed. These expenses may be related to both personal and business purposes.
The non-deductible expenses are the expenses that cannot be subtracted from the gross income to reduce the tax amount owed. These expenses cannot be included in the tax-deductible cost and do not contribute to generating income for the business.
Some of the common expenses for the business are mentioned below.
- Employee Benefits—Every business offers certain benefits for their employees. However, these benefits vary for different kinds of businesses. Some of the common employee benefits include incentives, medical coverage, food allowances, travel allowances, ESI and PF contributions, extra pay for overtime work, etc.
- Employee Salaries—The salaries of the employees are not the same for everyone and vary according to the employee's experience and their performance. Sometimes, there may be situations of offering bonuses and increments.
- Advertising Expenses—The success of most of the businesses lies in the reach of the business among the audience. Advertising is a better strategy to reach maximum people, and for advertising purposes, certain expenses will be there. Printing posters, paying for promotions, running ads, etc. are the common advertising expenses.
- Rent and Maintenance Allowances—Some businesses may run in a rental building, and some may run in their own property. Rent must be paid for the businesses that are operating in rental buildings. The maintenance charges, like electricity payments, painting charges, etc.
- Vehicle Expenses—Some businesses may need a vehicle for various purposes. In such cases, expenses like registration fees, petrol and diesel charges, inspection process, mileages, and toll charges are associated with the vehicle expenses.
- Food Expenses—If any client meeting takes place virtually, then it may be accompanied by a breakfast, lunch, or dinner. This expense comes under the food expenses category.
- Office Requirements—Office requirements are common for every business. Computers, printers, barcode machines, and Xerox machines are the common expenses that come under the office requirements.
- Travel Expenses—If the business owner goes to several places for the promotional work of their business, then the costs that are charged for tickets come under the travel expenses.
There are different steps to categorize all the expenses associated with the small business.
First, you must categorize the type of expense and decide whether the expense comes under the deductible or non-deductible category. Generate a financial statement that helps in determining the expenses that are essential to your business and the expenses that are not essential to it.
Review and track the financial records regularly. This tracking process can be done in a simple way through accounting software.
Don’t mix the business and the personal funds, as the mixing of both finances may result in legal trouble.
InvoiceTemple’s invoicing software helps in categorizing and tracking the expenses. Make use of it and take effective decisions for the growth of your business by wisely categorizing the expenses.
