August 11, 2022
Different kinds of expenses have different tax implications, so if you want to keep your tax bill as low as possible, it’s important to learn how to categorize expenses in QuickBooks or any other accounting software you happen to use. Here’s a quick and comprehensive guide to how to categorize business expenses in QuickBooks.
Whether you do your own books or have a bookkeeper or accountant do it for you, categorizing expenses correctly is a very important part of the accounting process.
Every business expense you have falls into a different predetermined category. These expenses need to be categorized or “coded” in your accounting software so they are assigned to the correct category of expenses.
The reason for that is that some business expenses are tax deductions, while others are not. So if you put your expenses into the wrong categories, you could underpay on your taxes, or you could be taxed more than you should. Neither of those options is ideal!
Whenever you enter an expense into QuickBooks, you will be prompted for a category, and QuickBooks will actually suggest a category that might be appropriate. You do need to check that the suggested category is correct, though, because QuickBooks doesn’t always get it right!
If you don’t agree with the suggested category, use the drop-down menus to select the correct category before you complete the entry.
QuickBooks desktop and QuickBooks online work very much the same way, and once your categories are set up, it will prompt you with a category suggestion. Simply confirm or change the category and then save your entry.
QuickBooks does have some categories predefined, but there might be additional categories that you need to create yourself.
When you are capturing and recording expenses in QuickBooks, it’s important to remember that your personal and business expenses need to be separated.
Follow the same procedure as you would categorize any other expense by choosing to create a new category for Owner’s Draw and then categorizing the expense accordingly. Remember that you will have to declare that amount as income on your personal income taxes, so you will pay tax on it.
As mentioned above, personal expenses incurred by a company owner are categorized as “Owner’s Draws,” which is a category you need to create in QuickBooks because it doesn’t exist automatically. If you have to record personal expenses for more than one person, you should create a category for each person so that you can track the business expense as well as record the income on their tax forms.
QuickBooks is a wonderful accounting platform, and once you’ve mastered how to categorize construction expenses in QuickBooks or how to categorize office cleaning expenses in QuickBooks, it’s easy to ensure your expenses are captured in the right categories.
However, QuickBooks doesn’t always offer the detailed reporting options that many business owners need.
LiveFlow was created to fill that gap, and with our Google Sheets Add-On, you can choose which data to link to your Google Sheets spreadsheet, so you can get live, real-time, up-to-date expense data when you need it.
Contact our team to learn more about how LiveFlow can help you to manage your business expenses better using custom Google Sheets.