Depending on the size and type of your business, you may have a long list of different accounts to keep track of, or perhaps just the bare minimum if you're just getting started or your business is very small. No matter how you categorize your accounts, they are going to fall into two basic accounting categories: income accounts and expense accounts. Let's take a closer look at the latter of these two and find out why keeping track of your expense account (or accounts) is so important for your company's financial well-being.
What are Expenses?
Expenses are costs incurred in the course of operating your business. When an expense occurs, there is an outflow of cash or other assets from the business to pay for the goods and services acquired. (Take an in-depth look at the definition of an expense in accounting.) Like we mentioned before, the exact number of accounts you'll need to keep your business running optimally will vary widely based on what kind of company you're running. However, there are some broad categories of expenses you should be aware of when setting up your expense accounts, which we'll take a look at below.
Categories of Expenses
Briefly, the main categories your business expenses will fall into are operating expenses and non-operating expenses. Like their names imply, operating expenses are those that are needed to operate your business. Examples include cost of goods sold, payroll, and utilities. Non-operating expenses, on the other hand, are things like finance charges (on a loan, for example), which are not directly related to the operation of your business.
On your expense report, these expenses can be further divided into fixed and variable expenses, and/or into other categories like administrative expenses and sales-related expenses.
An expense account can be used specifically as an expense allowance to track expenses incurred by employees. This is normally done for reimbursable expenditures like travel costs and meals on a business trip. It's important to carefully track these expenses for accounting and tax purposes, and it also allows you to see if company assets are being spent wisely or if certain expenses/allowances should be modified.