Welcome to our #AskACPA feature where we answer financial, accounting and business questions.
Question: I’m a side hustler and small business owner? How can I keep track of the expenses in my business?
One of the most frequently asked questions by small business owners is how to keep track of expenses, so as keep them from getting out of hand and better control them. If you’re a small business owner, whether you are side hustling or working on your business full-time, you know how important this can be. Not only is it crucial for you to account for what you’re actually spending, but having an accurate record of your expenses also comes in handy at tax time when you’re reporting these and potentially getting some related deductions.
Here are a few ways that can help:
- Open a business bank account
Having a separate business account dedicated exclusively to business transactions makes it easier to track your business expenses and record them accurately. While you may use your personal account in some (rare) instances, you will eventually need a business bank account.
- Set up your accounting system: Cash or accrual accounting?
Cash or accrual accounting?
Cash accounting consists of recording transactions when cash is exchanged. As such, you would only record your expenses when you pay for them in cash, and would record revenue only when received. Cash accounting is often used by very small businesses, as well as freelancers and sole proprietors, because of its simplicity and ease of use. However, this simplistic accounting method quickly becomes inadequate as the business grows, uses other forms of payment than cash, or needs more detailed bookkeeping.
Accrual accounting, on the other hand, requires that revenue or expenses be recorded when the transactions generating either actually happen, not when cash is paid or received. As such, you would record revenue when selling a product or service, not just when you’re paid for it. Similarly, you would record an expense when incurred, not just when you pay for it. This system of accounting is more accurate, and more suited to growing businesses.
It’s essential that you set up your accounting system properly based on your business goals and outlook.
- Manage your records accurately
Last but not least, manage your receipts properly so you have accurate records for your expenses. While this can be done using a manual system such as folders and envelopes, it is more practical to do so using an application you can easily access through your phone or compute. Quickbooks offers a convenient way to scan in your receipts or download them as part of their bookkeeping suite.
In addition, make sure to promptly record your expenses in the system of your choice. While you may also use more of a manual system such as Excel spreadsheets for instance, using an accounting software that allows you to electronically record and keep track of your expenses can be more beneficial. Quickbooks not only allows you the convenience of scanning in your receipts, but also helps you record these expenses as part of your bookkeeping.
All in all, tracking your business expenses is central to your business. Without properly recording and managing your expenses, you put your business at risk and endanger your hard-earned revenues.
Got a business or financial question? Please email us at corporate@thecorporatesister.com
The Corporate Sister.
