Business expenses are notoriously difficult to track. However, proper tracking of receipts is crucial to an accurate tax return. What are some easy methods that can be used to not only keep on top of business expenses through the year, but also avoid the typical stress of trying to arrange all your business expenses during the week just before your meeting with your tax preparer?
Determine your categories
The first step to tracking business expenses successfully is to decide on the categories you will be using to track your expenses. For instance, you will likely need a category for advertising, as well as for supplies and office expenses. Try to avoid a "miscellaneous" category as much as possible, since any expenses placed in this category will need to be reviewed individually later when your tax preparer is working on your tax return.
Categorize your expenses
The next step is to categories your expenses based on the categories you chose. This is accomplished best by writing the category on the receipt or next to the item on the receipt that fits into that category. You will often have multiple categories on one receipt; for instance, if you are a construction worker, you may purchase supplies and tools during the same trip to the hardware store.
Track your expenses
After your expenses are categorized, you then must track your expenses either on paper or electronically. For very small businesses, a simple tablet with one category per page can work well. For larger businesses, electronic methods are generally needed, such as Excel or QuickBooks. Regardless of the method you use, the information recorded should include the date of the purchase, the name of vendor (for instance, "AgSalt Processing" or "Precept Printing"), the category, and the amount of the purchase. Other details such as the specific item you purchased could be included, if helpful for later reference.
File your receipts
After listing your expenses, you should file the receipts in a way that enables you to find them later. For some, it may work best to staple the receipts to the bank or credit card statement on which the charges appear. For many, the best solution is to use alphabetical file folders and file the receipts according to the vendor name. Whatever method you use, be sure to include enough information in your expense tracking list to enable you to find the receipt later. For instance, if you file the receipt based on the credit card used to make the purchase, include a note on your expense tracking list that indicates which credit card was used.
Report on your expenses
After your expenses have been tracked over the period of several months or a year, it will be much easier for you to see exactly where your business income is going. At the end of a month, quarter, or year, you can easily add up the various categories and create a report of the income and expenses during that time period. At the end of the year, you can either take your entire list of categorized expenses or simply an annual summary of those expenses to your tax preparer to use in preparing your tax return.
In addition to income tax preparation, Yoder Financial Services also offers complete bookkeeping solutions for businesses. Contact us if you would like assistance in setting up a bookkeeping system for your small business, or if you would like for us to handle all of your paperwork for you. We are always happy to help you track your crucial business information in order to provide management information and the tax return accuracy you expect.