Before I can explain what an expense is, I will need to talk about costs. A costs is what you give up in your business to make money. A cost can be either an asset or expense. For example, an internet business will need a website so will have to give up cash to host its website. An expense is a cost that is used up within short period of time (normally within 30days) after value has been exchanged.
On the other hand, a cost is that has future value (that is, not used up in a short period of time) is called an asset. Both expenses and assets are needed to grow a successful business.
Expenses are classified into operating and non-operating expenses.
Operating expenses are the expenses incurred as part of the regular operation of the business. Before you classify operating expenses in your business, you should start by asking yourself the following questions:
- What is the purpose of my business?
- What expenses will I need to attain the desired revenue level?
- Are there any accounts that should be classified separately because of the way it is treated for tax purposes? Some examples are meals and entertainment, gift expense, supplies and repairs.
Once you know the expenses your business will need to bear, break the expenses down into categories. These categories are the expense that will be monitored in your financial software. Any expense that has a special rule for taxes should be kept in its separate account. You will need to consult with your certified public accountant to decide what these expenses are.
Joe Blow who owns an internet business subscribed to an online accounting software. Joe needs to figure out how to set up his chart of account. Joe’s revenue are from 3 main sources namely:
- E-Book sales
- Advertising revenue
- Subscription revenue
To make the income above, Joe Blow needs to spend money in four main categories namely:
- Administrative tasks
- Growth initiatives
Now that Joe knows his four main expense categories, he can take each of them and make accounts that detail the activities under each category.
Joe uses the marketing category to classify expenses that has to do with promoting his business. Joe plans to place ads online, take potential clients to lunch and hire a marketing assistant to follow up on leads. Therefore Joe creates the following sub accounts under marketing:
- Advertising expense – this will be used to classify any pengeluaran hk expense that has to do with his online or offline advertising
- Networking meals – used to classify lunch with clients and potential clients. Meals will need its own category because only half of these expenses are deductible for tax purposes
- Mileage expense: this is mileage expense Joe reimburses himself from his business. Joe travels to meet clients and potential clients.
- Marketing staff/ subcontractor – used for any subcontractors hired to promote Joe’s business.
The expenses that fall under marketing are discretionary in nature. This means that if business is not doing as well, you can look at this account to see what expenses you can cut off. If you have a fixed marketing costs such as a subscription service, then you should classify them under the subscriptions category.
When running a business online, there are a variety of applications you can subscribe to help increase your bottom line. Since these subscriptions are a big part of your cost of doing business, they should have their own category. For example, Joe subscribes to 3 services: one for hosting his website, one for his subscription services and one for his email subscription service. Joe will create a subscription account and create the following subaccounts: