Expense Classifications – End the Mystery!

Have you ever looked at a profit and loss statement, and wondered why the heck an expense category is so high?  Maybe a better question is have you ever looked at a profit and loss statement, but that’s a whole ‘nother blog!

I have a client that I mentioned in my last blog (here) that wanted to classify a tip from a meal as a casual wage.  Since we discussed how wrong that was, I won’t touch it here (so go back and read it!), but it can skew profit and loss statements into showing excessive spending in false categories.

I know many QuickBooks charts of accounts come with a standard auto expense.  But really, what all are you putting into it?  Gas?  Maintenance?  Parking and toll charges? Insurance?  Registration?  In my opinion, these should be broken out.  Why?  Let”s take registration.  Did you know that part of your registration is tax deductible?  Yup!  You will want to track that sucker.  If you are not taking the government allowed mileage reimbursement, your actual expenses are also deductible.  Technically, it’s fine if they’re all together, but let’s look at it deeper.  As a managerial accountant, I like to track fixed and variable expenses.  Gas, maintenance, parking and tolls are all variable expenses.  They fluctuate based on how much you’re traveling.  However, your insurance and registration are fixed.  You will have to pay them regardless if you’re traveling or not, right?

Gas mileage is an indicator for car performance.  If you are on top of your reports, you can see when you start spending more on gas.  Granted, California gas prices have been skyrocketing lately, so it’s not a perfect indicator, but it’s there if necessary.  Parking and tolls are good to track separately as you can potentially bill them back to a specific job or client.

It’s best to be as detailed as possible with the general expense categories, but you don’t want to get so detailed with your chart of accounts that you have a separate categories for pens, pencils, markers, etc.  Use common sense.  If you rent office and warehouse space, break them out.  You will pay your office rent regardless of whether you have customers or not, however your warehouse rent may be based on square footage, and thus non-existent if you don’t have product to sell.  Use separate categories for radio advertising, print/media advertising, and yellow pages advertising.  Track which one is getting you more bang for your buck, and focus your advertising budget on that medium.

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