There are so many things we keep track of on a daily basis: bank balances, dogs, kids, and how much gas is in the tank. But if you’re a business owner, you’re also tracking expenses. There’s two ways to dress up an expense: in every day work clothes which is accounting and in the court date outfit which is the IRS. Since accounting comes before tax, that will be this week and the IRS will be next week. Keep in mind there is a difference between profit and taxable income.
REINFORCING THE BASICS.
What is an expense? According to the big boy of accounting, US GAAP (United States Generally Accepted Accounting Principles) expenses are outflows of assets (cash) or incurred liabilities (accounts payable, accrued expenses) in connection with producing product or providing services in order to generate revenue. Expenses provide a benefit, either in the future or in the here and now. In simpler terms, spending money to make money.
To get a good read on profit it is important to match expenses with revenues (matching principle) by recording them in the same period and employing the arts of accrual and deferral when necessary. In accordance with US GAAP there are three ways expenses and revenues are properly matched: association of cause and effect (we go together); systematic and rational allocation (spreading it out); and, immediate recognition (now).
THE WHEN OF AN EXPENSE.
We go together presumes a direct association by being able to trace a specific expense to a specific sale and then recording both at the same time. Sales commissions, royalties, transportation expenses. If you are a restaurant and cater an event, the purchases can be tied to that specific sale. If you are a landscaper, the sod, bushes, and your time planting can be tied to a specific sale.
A lot of expenses cannot be traced to a specific sale/revenue. Some of these untraceable expenses are the ones that are expected to last a while and as such are spread out over time. GAAP calls for these expenses to be allocated to the accounting period benefited in a systematic and rational manner. This is depreciation, amortization, and allocation of prepaid expenses. Ovens and lawn mowers are depreciated over time. Insurance policies when prepaid are allocated over months.
When an expense is neither traceable nor lasts awhile, it is a now (period cost) cost and is expensed immediately. Examples of costs that might be now are utilities, routine maintenance costs, and salaries and wages. If you advertise this week take out only during social distancing, that is a now cost so is filling up the lawnmower to cut the grass which was once sod.
THE WHERE OF AN EXPENSE.
Everyone has their type and so do expenses. Expenses can be cost of goods sold (COGS), operating, or other. COGS relate directly to making a product. If you are a restaurant, food and beverage purchases and cook and server wages are COGS. If you are a landscaper, the bushes and sod and wages paid to plant are COGS, so is gas for the lawnmower. COGS can be purchases, labor, materials and supplies and overhead. Overhead is operating expenses that you can trace to the product. For example, the portion of the electric bill for the factory floor as opposed to the portion for the office area or the insurance for the delivery truck as opposed to the shareholder’s auto. As you can see utilities and insurance are COGS or operating depending on where traced. Interest expense, no matter on what; fines and penalties; and, taxes are other expenses.
Expense tracking is routine and unenjoyable which has lent itself it to automation using artificial intelligence and technological processes. If you are still stuck behind a computer data entering every invoice and payment, we suggest you get up and look around. Look at your phone and look up towards the cloud.
Mobile apps are tracking and storing receipts, tracking mileage and even depositing reimbursements into accounts. Mobile apps are reconciling corporate cards, generating expense reports and integrating with ERP packages (such as SAP, Oracle, NetSuite, Microsoft Dynamics/Navision) and of course QuickBooks.
In summary, if you get the when and the where of an expense right, you will have good data for gross profit, operating profit, and net income. Good data goes a long way toward making good management decisions.
WHAT ELSE SHOULD I KNOW?
In no specific order and without any recommendation, here are a few expense tracking apps: Zoho, Expensify, Rydoo, Shoeboxed, and QuickBooks. We will say; however, as an AICPA member, the only AICPA recommended solution is Expensify.
Not everything tracked is deductible. Come back next week for our blog about deductibility of expenses.
What is said to be the first expense tracking app? Hint: it made QuickBooks possible.
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