Accounting Expenses: Everything you need to know

Taking care of your business accounting expenses can be challenging, and carry a great deal of responsibilities that can make or break your growth.

Outdated depictions of accounting are overwhelmingly complex spreadsheets, and a tower of crumpled receipts and invoices. But unless you live in the past, those days are gone.

Today, every business depends on proper expense management and streamlined accounting.

In this blog, we’ll cover the basics of your accounting expenses, as well as advice on how to keep track of them all.

💰 Accounting expenses: What are they?

Accounting expenses, by definition, are money spent (or costs incurred) by a company in pursuing revenue.

An important distinction to make here is the definition of an ‘expense’ as opposed to a ‘cost’.

Expense: fixed expenditures, such as rent or utilities, that belong in business taxes or a balance sheet.

Cost: production and operations fees as an estimated amount that a business will pay for something.

Here’s an example of the difference. Let’s say you need to buy a car for your pizza delivery business. The finances that are used towards this purchase would be an example of a cost. But the petrol that the car needs to get from A to B is considered an expense.

Lastly, your revenue minus all expenses is equal to the total net profit of your company.

Revenue  –  Expenses = Total Net Profit

Categories of financial expenses

Now that we’ve highlighted the difference between costs and expenses, let’s run through some examples of the business expenses that are likely to crop up:

📑 Types of accounting expenses

Direct expenses vs. indirect expenses

The types of expense and the time at which it’s incurred by your business is what determines the difference between direct and indirect expenses. Direct expenses are the expenses that are directly related to the core operations of your company. Mostly related to purchases and production of goods and services. Alternatively, indirect expenses are those that are necessary to keep a business up and running, but aren’t directly related to the central revenue-generating activity.

Operating vs. non-operating expenses Operating expenses refer to selling and general admin. That means anything related to selling goods and services, such as staff salaries and paid advertising. As you might’ve guessed - non-operating expenses are not connected to operating revenue. For example, if your company has an interest-based bank loan, the repayment fee would be a non-operating expense.

Fixed vs. variable expenses

A fixed expense is one that does not change over time, or changes only marginally. This would be the correct way to describe costs such as monthly rent for a workspace.

Variable expenses, on the other hand, vary from month to month. These are typically a company’s largest expenses – as variable expenses can count as freelance staff or overtime salary.

💡 What is an expense account?

All of these different expenses that contribute to the operation of your business should be recorded in your expense account.

Expense accounts help you track and organise all the various expenses your business incurs over time.

As we’ve pointed out, there are various categories for your expenses, so it’s always best to organise your expenses into sub-accounts.

Dividing your expenses account into sub-accounts will make it easier for you to keep track and budget for each expense.

But don’t forget - you should include balances for each sub-account as well as your total expense balance. Mistakes within the sub-account balances will ultimately skew your overall recorded balance.

💸 Types of company accounts

Expense accounts aren’t the only accounts you need to stay on top of, there are also the following to consider:

👉🏼 Income accounts - categories within your business’s books that show how it’s earned.

👉🏼 Assets accounts - categories within your business’s books that show the value of what it owns.

👉🏼 Liability accounts - categories within your business’s books that show how much the company owes.

👉🏼 Capital accounts - shows the net worth of your business at a specific point in time.

Accrual vs. cash accounting

Now, let’s discuss the ways in which you can record your expenses – either on an accrual basis, or a cash basis.

How to record an expense with accrual accounting

Using the accrual accounting method means that the expenses (in exchange for a good or service) is recorded once the goods have been received, or the service has been completed.

How to record an expense with cash accounting

In contrast, using the cash accounting method means that the expense is only recorded once the actual cash has been paid out. This latter method is arguably more straightforward, as the accounting simply reflects the cash trail. For this reason, it’s more commonly used by startups and small businesses, or for personal finances.

Allowable expenses - the essential costs that keep your business ticking over each month – are claimable. This means that because these expenses aren’t considered as part of your business’ taxable profits, you don’t pay taxes on them! However, being sure on what is considered an allowable expense and what is not is sometimes confusable - and inadvertently facing tax avoidance is the last thing a business owner needs. Examples of allowable expenses are; payroll for staff; business insurance; office utilities; supplies; software; advertising and marketing.

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So, that’s an overview of everything you need to know about accounting expenses. The types of expenses listed here are aptly named, so it should be fairly easy to get an idea of how to categorise your own.

Using a professional accountant is always the best route to take if you want to sure you’re complying within the bounds of the law whilst maximising the efficiency of your money-management.

Here at Jump Accounting, we know that early-stage businesses undergo rapid change.

That’s why we offer personalised and totally flexible accounting packages tailored to remain suited to your business as it scales.

And to achieve that all-important growth, we integrate the very best accounting strategies with our experience within startup financing to go above and beyond your traditional accountant.

We’re running a free webinar on Wednesday 20th April at 1pm (GMT), that will give an insight into our growth-focused accounting methods.

Click here to save your seat, and gain the accounting knowledge you need to set your business up for success!