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Small business owners wear many hats – CEO, accountant, marketer, and more. With so many responsibilities, it can be easy to overlook the importance of properly classifying business expenses. However, correctly categorizing expenses is essential for tax purposes, financial reports, and budgeting – all things Edgewater CPA Group can help you with. So, let’s make sure you’re classifying your business expenses correctly.
1. Understand the Different Categories of Expenses
To correctly classify your business expenses, you need to understand the different categories. The most commonly used categories are:
- Cost of goods sold (COGS) – these are expenses related to producing goods or providing services.
- Overheads – expenses related to running your business, such as rent, utilities, and equipment.
- Marketing – expenses related to promoting your business, such as advertising and PR.
- Travel and entertainment – expenses related to business travel and client entertainment.
- Professional fees – expenses paid to outside professionals, such as lawyers and accountants.
Each category has specific tax implications, so it’s crucial to correctly classify expenses to minimize tax liability.
2. Keep Accurate Records
Keeping accurate records is essential for correctly classifying business expenses. Ensure that you keep all receipts, invoices, and bank statements for the expenses you incur in your business. Use accounting software to manage your finances, as it will make recording and categorizing expenses much easier.
3. Separate Personal & Business Expenses
It’s crucial to separate personal and business expenses to avoid audits and tax penalties. Use separate bank accounts and credit cards for business and personal expenses. Also, avoid using business funds for personal expenses and vice versa.
4. Review & Adjust Regularly
Regularly reviewing your expenses will ensure that you are staying on track and making wise financial decisions. Analyze your expenses regularly to identify areas where you can cut costs or invest more. Also, review your financial statements to ensure your expenses are correctly categorized.
We’ll Take Care of Your Accounting
Correctly classifying business expenses is a crucial aspect of good financial management. But it can get confusing, and you risk misclassifying if you do all your financials yourself. So, don’t risk it! Edgewater CPA Group helps business owners throughout Carmel, IN, keep all their expenses and records straight. We can also solve tax problems and help you develop a business tax strategy. To get started, schedule your consultation today at (317) 386-7021.