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You may use a variety of methods to track business expenses, but in order to manage your business adequately, keep track of expenditures, and ensure that expenses are accurately accounted for, you will need to create an expense tracking system that works for you.
Part of the bookkeeping process is tracking business expenses properly. Any expenditure that is related to your business is considered a business expense.
Here are some common business expenses you are likely to encounter:
While these are the more common business expense categories, any purchase that is associated with your business can be categorized as a legitimate business expense.
The best way to track your business expenses is to use small business accounting software, which makes it much easier to track your expenses, classify them correctly, and have access to up-to-date financial information. This is especially important at tax time, since you’ll want to be sure to take all of the expense deductions that you can.
There are ways to track expenses manually, though this is only recommended if you have few business expenses to track.
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 transactions.
While there may be an instance when you use your personal bank account for business purposes, having a separate business account will make it much easier to track and record your expenses properly.
You have a choice about what kind of accounting system to use for your business. While the best option is to choose an accounting software application that will work for your business, you can also use spreadsheet software, such as Microsoft Excel to record income and expenses for your business.
If your heart is set on using accounting software, but it’s just not in your business's budget, opt for a free application such as GnuCash or Wave Accounting.
When setting up your accounting system, you’ll also need to choose either cash accounting or accrual accounting.
Most very small businesses, sole proprietors and freelancers use cash accounting as it’s very simple. When you use cash accounting, you simply record transactions when they occur. For instance, you record income when it’s received, and you record payments when they’re made.
Accrual accounting is more in-depth, and it’s a necessity for growing businesses, businesses with employees, or larger businesses. With accrual accounting, you record income when a product is sold, not when you receive payment for that product. The same goes for expenses, which are recorded when you receive the bill, not when you pay the bill.
Small business expense tracking can be simplified by connecting your financial institutions with your accounting software. While some may be uncomfortable with this option, it’s actually very safe, with safeguards built in to protect your data.
If you do connect your bank, you’ll be able to automatically download all banking transactions directly to your accounting software, and in many cases, have it automatically posted to the appropriate account.
This process makes it easy to account for every expense incurred by your business.
Many popular accounting software applications including QuickBooks Online, Xero, and FreshBooks, along with many others, allow you to easily connect your bank accounts for easy business expense tracking.
Another way to ensure that you’re tracking your business expenses properly is to use the mobile app that is available with your accounting software application. If your software doesn’t offer such an app, you can choose to use an expense management application that will integrate with your software.
These apps typically allow on-the-go expense management, allowing you to take a picture of a receipt and upload the image to your software, where it will be stored and later attached to the appropriate expense. If it’s a reimbursable expense, the receipt can be used for creating an expense report.
You learned in Accounting 101 that all income and expenses need to be accounted for. This can be done in many ways. If you choose to connect your financial institutions to your software application, this process becomes fairly automated, though you will have to set up your accounts properly to insure proper allocation of the uploaded transactions.
Some applications offer the option to enter expenses manually. This is a good alternative for those who choose not to import transactions automatically. In most cases, you can also choose to import your bank statement at the end of the month and record your expenses at that time.
Finally, completing your bank reconciliation on a monthly basis helps to ensure that all transactions have been properly accounted for.
While not necessary for everyone, if you travel a lot for business, it may be worth investigating some of the expense apps on the market. These apps are designed to track travel expenses such as mileage, flight expenses, meals and entertainment expenses, and any other related business expenses.
As you can see, you have many ways to keep track of your business expenses, both manually, and by using accounting software.
While using accounting software is always best for any type of business tracking, including both income and expenses, there are times when it is a must.
If any of the following situations apply to you or your business, it’s highly recommended that you use accounting software if you’re not already doing so:
While accounting software is the best business expense tracking solution, there are occasions when you can get by using spreadsheet software.
If any of the following situations apply to you, manually tracking your business expenses may be the right choice.
Whether you’re just starting out, are in the process of building your business, or are a well-established business, you need to track your business expenses.
So take a few minutes and put a plan in place that will allow you to track your business expenses easily and accurately.
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