Purple Expense Binder

The Most Common Mistakes When Categorizing Expenses

3 min read • Jan 11, 2021 • Derek Miller

The principles of bookkeeping aren’t necessarily difficult, but they do require attention to detail. When done well, bookkeeping can provide a clear picture of your organization’s revenue channels and expenses, making it easy to optimize for increased profits.  

If you’re a new business owner, now is the time to get into good bookkeeping habits. The steps you take today can help your company as it grows. Start with expense categorizing. Here are a few common mistakes to avoid. 

Using Overly Broad Categories

One of the most common mistakes that business owners make is failing to set aside detailed categories for business expenses. For example, they might have a category for “equipment” but not sort it by employee uniforms, protective equipment (like gloves), and large machinery. Similar expenses get lumped together under generic insurance, payroll, taxes, and utility fees.

While a macro-view of expenses is important, you may want the ability to see expenses more granularly to determine if and where you are misspending. Consider developing categories and subcategories for your expenses so you can better understand your business costs. 

Having Too Many ‘Other’ Expenses

Any expense that doesn’t fit into a specific category will likely get filed under miscellaneous or labeled “other.” It makes sense that you will have one-off expenses that don’t fit under any real cost. However, if this category starts to get bigger and unwieldy, you may want to rethink how you’re designating these types of expenses.

For example, if you treat your employees to lunch each month, you could create a category for “morale,” and budget for these costs each month. You can also plan for company holiday parties and team birthday celebrations. Suddenly, these “other” costs can be tracked, planned, and accounted for. 

Forgetting Small Costs 

Within your bookkeeping ledger, you need to record every expense and revenue transaction. It may be tempting to ignore a few minor expenses here and there, but these can add up and create confusion when you balance your books. 

Let’s say you attend a conference and charge $25 in gas to the company card. That is a small expense, but your bookkeeper will wonder why there is $25 missing from the ledger and where it went. Failing to report these expenses could also be considered a form of fraud, as there is no way to hold the company accountable for it. 

Failing to Reconcile Your Ledger With Your Statements

Speaking of your ledger, you should set aside time to reconcile your records with what your bank and credit card companies report for your expenses. This process needs to be done at least monthly, though you may want to do it weekly if you have a large number of expenses. 

Failing to ensure that your records match the bank’s can cause confusion during tax season, prevent you from catching fraud early on, and provide you a false budget report that could affect your company spending habits. 

Over time, you will use your expense sheets to set budgets and estimate expenses. The better your sheets are now, the greater chance that you can glean information from them and make strategic decisions in the future. At Lendio, we can help. Learn how our simple bookkeeping system can help you get organized and set yourself up for success.

Where’s all your money going? With Lendio expense tracking, it’s easy to account for every penny.
The information provided in this post does not, and is not intended to, constitute tax advice; instead, all information, content, and materials available in this post are for general informational purposes only. Readers of this post should contact their tax professional to obtain advice with respect to any particular tax matter.

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Derek Miller

Derek Miller is the CMO of Smack Apparel, the content guru at Great.com, the co-founder of Lofty Llama, and a marketing consultant for small businesses. He specializes in entrepreneurship, small business, and digital marketing, and his work has been featured in sites like Entrepreneur, GoDaddy, Score.org, and StartupCamp.