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How to Keep Track of Business Expenses

Keeping track of business expenses is one of the essential elements of accounting for your small business. Tracking your business expenses not only helps you claim all the tax deductions you are due, but it also helps you run your business profitably.

Below, we’ll get into the specifics of how to keep track of your business expenses with six tips and best practices.

How to Keep Track of Business Expenses: 6 Tips

Keeping track of business expenses is crucial whether you’ve just launched your business or have been operating for years. These strategies can help you keep things in order.

1. Separate Your Business Finances

Even if your business is a sole proprietorship, you must keep your business and personal finances separate. Establish separate business bank and credit card accounts, and make it a practice to only use these business accounts for business purposes. That means that any business-related expenses are paid for via your credit card or bank account, and any money that comes into your business goes into your business checking or savings account.

What if you can’t get a credit card for your sole proprietorship in your business’s name? Open an account under your name, but only use the card for business purposes. Put a sticker on it if you need to in order to remind yourself that this card is for business use only.

Keeping your finances separated makes your record keeping easier. It also sets you up for successful practices as your business grows beyond sole proprietorship. And it provides you with a measure of protection if you’re ever audited.

2. Invest in Software

Keeping track of business expenses can be complicated and time-consuming. That’s why you’ll want to invest in the right software to help automate the process and make it as seamless as possible. Not to mention, this will help ensure your files aren’t accidentally misplaced, thrown away, or taken out of order.

The bottom line is your expense tracking will take a lot less time and be more accurate if you leverage accounting software and apps.

There are three types of software you should have for your business:

General ledger software: When you’re first starting out, a spreadsheet will work for your expense tracking system. Unless you set it up properly, a spreadsheet will only be a single-entry accounting system, though, and you will want a double-entry accounting system sooner rather than later.

We recommend using cloud-based accounting software for your business. One popular option is QuickBooks Online because it’s easy to use, widely supported by accountants and bookkeepers, and provides you with the reporting you need to effectively manage your business. However, there are a range of options out there from free accounting software to accounting software for freelancers or self-employed professionals.

Depending on what you need your accounting software to do, you can find options to manage your invoices and business budget, track mileage, and more.

Mileage tracking apps: If you or your employees drive your personal vehicles for business purposes, you need a mileage tracking app. Apps like MileIQ run in the background of your smartphone and let you categorize business vs. personal drives with a quick swipe of your finger. You can download detailed reports from the MileIQ website for tax and other reporting purposes.

Receipt management apps: As we’ll get into more below, keeping your receipts is one of the must-dos of expense tracking. You could keep all your paper receipts, but then you’d have to file them. Plus, paper is fragile and thermal receipts degrade over time.

A better option is to use receipt management apps that digitize your receipts and let you easily find them from your computer should you need them again. Your accounting software may have this function, or you can use a separate expense tracking app, such as a standalone receipt management app like Receipt Bank.

3. Keep Your Receipts

Having a good receipt management system in place not only gives you the backup you will need in the event of a tax audit, but it also helps protect you from fraud. In addition to receipts, you’ll also want to hang onto other important documents like bills and invoices.

If you followed the step above, you’ll have the software and apps to maintain these documents digitally, but if you are working with paper copies, make sure they’re stored in a secure place and are clearly organized.

4. Track Your Expenses

Expenses like mileage and contributions you make to your business (either in cash or by purchasing supplies with your own money) won’t have physical receipts but must be tracked all the same for both management and tax purposes. Again, leverage software to help streamline this process and reduce the likelihood of errors.

5. Choose Your Accounting Method 

Choosing an accounting basis is an important part of tracking your business expenses, as it dictates the way that income and expenses are recorded on your financial statements. Both your general record keeping and your tax filing will be affected by the method you choose.

Two popular accounting methods are cash and accrual basis. Most businesses choose cash basis accounting since it’s easy to implement and maintain, plus most businesses in the U.S. are cash-basis taxpayers.

However, if you let your customers pay you after the point of sale (meaning your business has accounts receivable), or if you pay your vendors after taking possession of goods or services (meaning your business has accounts payable), you’ll need to use some form of accrual basis accounting. Accrual basis accounting takes a little more effort, but it can provide you with invaluable information about your business.

Feel free to consult a professional (more on this below) when deciding which accounting method is best for your business, but the most important thing is to choose one and implement it across your business.

6. Use a Professional

As you may have gathered from the previous steps, learning how to track business expenses can be a full-time job—and for some people, it is their job. If you feel overwhelmed at the prospect of keeping all your business expenses in order or you simply want some professional guidance to help you through the process, you may want to consider hiring an accountant or bookkeeper.

Accountants and bookkeepers go beyond filing your business’s tax returns. Even if you don’t use their services on a recurring, monthly basis, you may want these professionals in your corner to help you:

  1. Choose your accounting basis
  2. Properly set up your business structure from a tax and a legal standpoint
  3. Set up your bookkeeping software and train you on how to use it
  4. Set up and oversee your payroll
  5. Manage your cash flow
  6. Provide checks and balances that protect your business from fraud
  7. Determine your estimated quarterly tax payments
  8. Advise you on major business decisions

Look for accounting professionals who aren’t focused solely on the tax aspects of expense tracking and bookkeeping. A good accounting professional will help you maintain your business’s financials in a way that lets you make good management decisions.

The Bottom Line

Keeping track of your business expenses is a necessary part of the bookkeeping process. Tracking these expenses doesn’t have to be burdensome, though. The most important part is to create a system early and stick to it.

Start with a business bank account and credit card, make sure you keep all your receipts, track your expenses, and turn to the professionals—both software and real people—to help you maintain order.

With your business expenses in order, you’ll be able to prepare your financial statements, gauge how your business is doing financially, prepare and file your business taxes (including taking advantage of all possible deductions), and more.

The post How to Keep Track of Business Expenses appeared first on Fundera Ledger.

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