March 2024 Managing the Money with Megan Schmitke

How You Categorize Your Expenses Doesn't Matter

by Megan Schmitke

One of the most common questions I get asked by business owners who do their own bookkeeping is “What type of expense is my [insert common purchase here]?”

Many business owners are so hung up on making sure they call these expenses the “right” thing, when in reality…

…it doesn’t matter.

Or, at least it doesn’t matter as much as you might think.

As a general rule, anything that you spend money on that is ordinary (meaning other business owners in your industry spend money on it too) and necessary (meaning that this purchase is essential in you operating your business), it is 100% deductible - no matter what you call it.

There are a few exceptions and limits around business meals & gifts, and it’s important to remember that your inventory purchases are considered an ASSET, not an expense. But pretty much anything else - call it whatever you want!

…Your monthly Canva subscription? You can call it “Software Expense”, “Software & Apps”, “Subscription Expense”, “Office Supplies” - or whatever else floats your boat!

I have 2 general rules when it comes to how you should be categorizing your expenses:

Number #1: Make sure it makes sense to you.

You should be able to look at your Profit & Loss statement every month and know exactly where all your different types of expenses fall. If you use a software (which I HIGHLY recommend you do), feel free to rename the different default expense categories and use terms that are clear to you.

Number #2: Be consistent.

If you choose to group your Canva expenses in with other Software Expenses, make sure you are ALWAYS putting it in that bucket. This will help you be able to compare your expenses from month to month or year to year, and be able to accurately compare these expenses.

So, don’t worry so much about HOW you’re grouping these types of expenses, and just make sure that it makes sense to YOU! You are the business owner, and your finances should be organized in a way that’s clear for you to understand.

If you want help feeling more confident in your bookkeeping this year, then I would love to invite you to join my free masterclass. You can register for a time that works for you here: https://www.findingfreedomfinancial.com/masterclass/