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What You Need to Know about Accounting Expenses?

Managing your business accounting expenses presents challenges and carries significant responsibilities that can determine your growth’s success or failure.

Complex spreadsheets and piles of crumpled receipts and invoices once dominated accounting, but these outdated methods have become obsolete in modern times.

Nowadays, proper expense management and streamlined accounting are crucial for every business.

In this blog, we will explore the fundamentals of accounting expenses and provide guidance on effectively tracking them.

accounting expenses

What are accounting expenses?

Accounting expenses are the funds a company spends or costs it incurs to earn revenue.

It’s important to distinguish between ‘expenses’ and ‘costs’.

An expense refers to fixed spending like rent or utilities, which you include in business taxes or a balance sheet.

A cost, on the other hand, relates to production and operations fees, estimating the amount a business will spend on something.

Consider this example: buying a car for your pizza delivery business represents a cost. However, the petrol needed for the car to travel is an expense.

Finally, your company’s total net profit equals your revenue minus all expenses.

Types of accounting expenses

Direct expenses vs. indirect expenses

What differentiates direct from indirect expenses are the types of expenses and when your business incurs them.

Direct expenses directly tie to your company’s core operations, primarily involving purchases and production of goods and services.

Conversely, indirect expenses are essential for maintaining business operations but don’t directly connect to the main revenue-generating activities.

Operating vs. Non-Operating Expenses

Operating expenses include selling and general administrative costs, covering everything from staff salaries to paid advertising, all related to selling goods and services.

Conversely, non-operating expenses don’t link to operating revenue. For instance, the repayment fee for a bank loan based on interest at your company counts as a non-operating expense.

Fixed vs. Variable Expenses

A fixed expense remains constant or changes only slightly over time, like monthly rent for a workspace.

In contrast, variable expenses fluctuate each month and often constitute a company’s largest expenses. Examples include costs for freelance staff or overtime salaries.

What is an Expense Account?

expense account

You should record all the different expenses contributing to your business’s operation in your expense account.

Expense accounts assist in tracking and organizing the various expenses your business accumulates over time.

As we’ve mentioned, expenses fall into various categories, making it wise to sort them into sub-accounts.

By dividing your expense account into sub-accounts, you simplify tracking and budgeting for each expense.

However, remember to include balances for each sub-account and your total expense balance. Errors in sub-account balances can distort your overall recorded balance.

Types of Company Accounts

Besides expense accounts, you also need to manage the following accounts:

~ Income accounts categorize how your business earns its income, as shown in your business’s books.

~ Asset accounts represent the value of what your business owns, detailed in your business’s books.

~ Liability accounts display the amount your company owes, as recorded in your business’s books.

~ Capital accounts reflect the net worth of your business at a specific point in time.

Accrual vs. Cash Accounting

Let’s explore how you can record your expenses using either accrual or cash accounting.

Recording an Expense with Accrual Accounting

When you use accrual accounting, you record expenses (for goods or services) as soon as you receive the goods or complete the service.

Recording an Expense with Cash Accounting

Conversely, with cash accounting, you record the expense only when you actually pay out the cash. This method, more straightforward as it tracks the cash flow, is popular among startups, small businesses, and for personal finances.

Claimable Allowable Expenses

Allowable expenses, the essential costs that keep your business running each month, are claimable. They don’t count as part of your business’s taxable profits, so you don’t pay taxes on them.

However, it’s crucial to distinguish between what counts as an allowable expense and what doesn’t to avoid inadvertent tax avoidance.

Examples of allowable expenses include payroll for staff, business insurance, office utilities, supplies, software, and advertising and marketing.

accounts

Conclusion

This overview gives you everything you need to know about accounting expenses. The types of expenses we’ve listed have clear names, making it easier for you to categorize your own.

Hiring a professional accountant is the best way to ensure you comply with the law and maximize your money management efficiency.

At Count, we understand that early-stage businesses experience rapid changes.

That’s why we provide personalized and flexible accounting packages that adapt to your business as it grows.

For achieving significant growth, we combine top accounting strategies with our experience in startup financing, going beyond what a traditional accountant offers.

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