Everything you need to know about accounting expenses
Taking care of your business accounting expenses can be pretty intimidating (unless you’re an accounting firm, of course).
When you think of accounting, you probably think of complex spreadsheets and digging around for crumpled receipts, but every business depends on good expense management.
We know that accounting expenses can seem complicated but things always seem easier when you whittle it down to the basics like: What’s a financial expense? What are the different types of expenses in accounting? And what’s an expense account?
In this blog post, we’ll cover accounting expenses 101, plus tips for keeping track of it all.
What are accounting expenses?
Let’s break that definition down because it’s important to highlight the difference between an ‘expense’ and a ‘cost’.
A cost refers to production and operations, and is an estimated amount that a business will pay for something. While expense refers to fixed expenditures, like rent or utilities and belongs in business taxes or a balance sheet.
Need to buy a van for your flower delivery service? The finances that you put forward to purchase that shiny new ride is a cost.
The petrol and maintenance that van needs are expenses.
And finally, your revenue minus all expenses is the total net profit of your company.
Categories of financial expenses
Hopefully, we nailed the difference between a cost and an expense, now let’s go through the most common business expense examples:
Types of expenses in accounting
The following are the common types of expenses when running a business:
Direct expenses vs. indirect expenses
The types of expense and the timing when at which it is incurred by your business is what determines the difference between direct and indirect expenses.
Direct expenses (as the word implies) are the expenses that are directly related to the core operations of your company. Mostly related to purchases and production of goods and services.
On the flipside, we have indirect expenses, which are necessary to keep a business up and running but aren’t directly related to the core revenue-generating products and services.
Operating vs. non-operating expenses
Operating expenses refer to selling and general admin. So anything related to selling goods and services such as sales team salaries and advertising.
Non-operating expenses (you guessed it!) cannot be connected to operating revenue. Say your company has a bank loan and requires interest payments, that’s a non-operating expense.
Fixed vs. variable expenses
A fixed expense is one that does not change, or changes only slightly. Things like the monthly rent for an office space.
Variable expenses vary from month to month and are typically a company’s largest expense. An example of a variable cost would be the payment for a large amount of freelance personnel, or overtime.
What is an expense account?
So, you have all these different types of expenses that make running your business possible. Where should this all be recorded? In your expense account.
Expense accounts help you track and organise all the various expenses your business has over a period of time.
Dividing your expenses account into sub-accounts will make it easier for you to know how much you’re spending on each expense, like payroll or rent. You should include balances for each sub-account as well as your total expense balance.
Types of company accounts
Expense accounts aren’t the only accounts you need to stay on top of, there are also these types:
- Income accounts
Categories within your business’s books that show how it’s earned.
- Assets accounts
Categories within your business’s books that show the value of what it owns.
- Liability accounts
Categories within your business’s books that show how much the company owes.
- Capital accounts
Shows the net worth of your business at a specific point in time.
Accrual vs. cash accounting
Now, let’s take a look at the way in which you can record expenses in the books – either on an accrual basis or a cash basis.
How to record an expense with accrual accounting
Using the accrual accounting method means that the expenses in exchange for a good or service is recorded once the goods have been received or the service has been completed.
As an example, when flowers are delivered to a customer and the payment is still pending, under accrual accounting the expense is recorded with the expectation that the money will be paid out in the future.
How to record an expense with cash accounting
With cash accounting, the expense is only recorded once the actual cash has been paid out.
This method is arguably easier as the bookkeeping simply follows the cash, and is more commonly used by small businesses and for personal finances.
Expenses you can claim
Expenses you can claim (aka allowable expenses), are the essential costs that keep your business ticking over each month.
These costs aren’t considered as part of your business’ taxable profits, meaning you don’t pay taxes on these expenses.
But the line between what is considered an allowable expense or not gets blurred pretty easily – and no one wants to be blamed for accidental tax avoidance.
Allowable expenses are things like: payroll for staff, business insurance, office utilities and supplies, software, travel expenses and mileage, advertising and marketing.
Notice a big expense missing from that list? Yepp, entertainment is not considered an allowable expense. So those client dinners and Christmas gifts – not tax deductible.
And a helicopter ride to get you to a client meeting on time, also not an allowable expense.
Time to get started! Pleo’s here to help
Now that you know all about accounting expenses, there's no excuse to fall into that trap of storing receipts and invoices to deal with at the end of each month.
Having that knowledge is the necessary first step, but why not use an expense management solution to get you up and running smoothly and quickly?
Pleo’s spending solution makes keeping track of expenses a breeze, not to mention its seamless integration with your favourite accounting software.
Why not learn more about how Pleo’s expense management software can save you time and money?
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