Tracking business expenses requires several steps, from setting up separate accounts for business transactions, to integrating your accounting software with financial institutions, to regularly saving receipts and reviewing your records. Follow these steps to properly track your business expenses:
Step 1: Open a business account
The first step in tracking your business expenses is to create business financial accounts specifically for your business transactions. You'll need to open a business checking account, a business savings account, and a merchant services account (to accept card transactions from your customers). Having separate accounts for your business makes it easier to manage your finances. And it'll be easier to claim tax deductions because your business expenses will be organized in one place.
You should get a separate card for business expenses so you don't have to sort through receipts. Plus, a dedicated business credit or debit card keeps your credit history organized and accessible, making it easier to receive business funds and rewards, like cash back on purchases and flight and hotel bookings.
Step 2: Choose accounting software
The next step in tracking business expenses is to choose accounting software that can automate your business records and track each expense. Accounting software makes it easy to monitor and organize your business expenses. The best accounting software comes with reporting tools that provide year-to-year comparisons of your business expenses. There are several free accounting software platforms available for businesses, so you don't have to spend beyond your budget to get accurate records.
When you set up your accounts, you choose how you want to report your income and expenses: cash accounting or accrual accounting. Cash accounting records transactions when you receive payment, while accrual accounting records every invoice and payment you receive.
Step 3: Connect your financial institution
To simplify tracking your business expenses, link your accounting software to your bank, which allows for automatic downloads of all your bank transactions and even categorizes your expenses. It also integrates other features, such as importing your daily transactions and downloading your bank statements to easily reconcile your statements.
Also, by integrating your bank accounts with your accounting system, you can complete bank transactions right in the software without having to log into your bank account. This synchronization reduces the time you spend recording expenses and ensures that no transactions are missed, ensuring accurate recording of your income and expenses.
Step 4: Keep your receipt
To accurately track your business expenses, make sure you keep receipts during the course of your business operations. The IRS requires that you keep all paper receipts and other documents, such as bank statements, for at least three years. Therefore, use a folder to store your paper receipts and make sure to write the purpose of each purchase on the receipt. You can also label and organize your folders according to date or category.
Tracking expenses has become easy with accounting software mobile apps and business expense tracking apps that can integrate with accounting software. These apps store receipts digitally. You can also scan receipts with your phone's camera and store them in the cloud. Receipts are also synced with your ledger, making it easy to keep track of each transaction.
Track all expenses including mileage, airfare, meals etc. and keep receipts.
Step 5: Review your business expenses
To get good results from tracking your business expenses, review your expenses regularly. Read through your reports, examine and analyze your numbers. Look at trends to see how much you're spending in certain areas and how your expenses are accumulating. Also, correct any errors or omissions.
Reviewing your business will shed light on the financial health of your business and help you make the right decisions needed to grow your business.
