If you’ve watched TV or movies about high-flying business executives, you’re probably familiar with the phrase “just expense it.” The idea of an expense account seems magical, as though you can conjure up anything with the snap of your fingers: meals, trips, hotel rooms, or even a night on the town.
But when you’re a new business owner and worry about business expense reporting, the concept loses much of its glamor. It’s downright tedious sometimes.
Filing expenses might seem time-consuming, but it’s essential. Tracking and reporting expenses is an integral part of proper finance management.
What Counts as an Expense?
An expense is a cost incurred during regular business operations. However, personal expenses accrued during business trips don’t count as expenses. In most cases, companies follow an expense policy that guides their employees on acceptable expenditures.
It’s essential to report these policies that categorize expenses to the IRS as some expenses can be deducted from your taxes. It’s crucial to make sure they are separated from the cost of goods sold, personal expenditures, and capital charges.
Bear in mind many costs qualify as business expenses, and they can be partially or fully deductible. Company purchases include furniture, supplies, company car, insurance, rent, subscriptions, legal fees, travel, meals, repair and maintenance, employee benefit programs, utilities, etc.
The IRS offers guidance on what expenses you can deduct and will only approve clearly reported expenses.
What’s The Best Method for Reporting Business Expenses?
The two standard methods of reporting business expenses and income are cash and accrual. Small businesses tend to use the cash-basis method; however, they usually switch to accrual reporting as their business grows. So, what’s the difference between the two?
Cash
The difference is a matter of timing. When you use the cash option, revenue is only recognized when customers pay their invoices. Expenses are also identified when paying bills.
However, the cash option is only available to businesses with no more than $5 million in annual sales. It’s a user-friendly method, but the reported results tend to vary.
Accrual
The accrual-basis method is more complicated because you record expenses when they’re consumed regardless of when you pay your bills. In this case, your financial results are likely to match your reported revenue and expenses within a given period. This allows you to recognize the profitability of your business.
It’s vital to choose the best option for your business. Consulting with a firm that offers professional accounting for startups helps you select the right reporting option.
Keeping Track of Business Expenses
If you have the right tools, tracking expenses don’t need to be a tedious process. An appropriate utility will help make tracking expenses a daily habit, allowing you to keep a closer eye on your business spending.
You will need an expense report, a form you should use to track your business spending. The report should only include purchases necessary for your business operations, such as gas, meals, parking, hotels, etc.
The report should include columns for date, vendor, client, project, account, employee, notes, and amount. Expenses should be differentiated using categories, such as insurance, advertising, rent, utilities, wages, travel, etc. Spreadsheets offer a low-tech option to tracking expenses if you’re launching a new company. As your business grows, you can switch to cloud accounting software.
Another tip is to store receipts properly, whether they’re paper or digital records, as they offer proof of expenses. Some computerized tools allow you to scan physical receipts and file them in cloud storage.
You can generate your expense reports monthly, quarterly, or annually. A monthly report is vital to monitoring your expenses, while the yearly report is essential in writing off expenses when filing taxes. Using expense-tracking software can make accounting more manageable and allow you to generate on-demand reports.
Stay On Top of Your Business Expenses
Knowing your business’ financial health is dependent on your expense reports and other financial records. Are you spending more than you should? If so, that can be a hit to your business. It’s vital to track and generate expense reports to control your business spending and take advantage of the IRS’s tax deductibles.
