Kasfia Rashid - "Money Matters with Kash the Bookkeeper"
Hello! Welcome to Money Matters with me, Kash the bookkeeper, the accounting show with NO NUMBERS! Accounting is the language of business. If you own a business or you are thinking of starting a business, you need to know your numbers and how to use them!
Money matters is all about the fundamental basics of the accounting language, Assets, Liabilities, Owner’s Equity, Revenue and Expenses. These building blocks of business can be arranged and rearranged for a customized experience. Once you understand the basics of any language it is much easier to communicate using that language.
We are almost at the end of our accounting tour! Only a few more concepts remain, need to catch up? Click here for all of the prior shows: https://feed.pod.co/money-matters-with-kash-the-bookkeeper
Last week we started our discussion on expenses with Cost of Goods Sold. This week we move down, below the line, to the world of Expenses.
Show Objectives - The Why
FINALLY! After nine weeks of accounting basics, we are here, one of our final stops on this mad journey, Expenses! First and foremost, what is an expense? Long answer: An expense is the cost of operations that a company incurs to generate revenue. Short answer: Money SPENT that doesn’t fall into an earlier concept category. It is the everyday living costs of the business. The majority of a business’ books and records is made up of various expense line items. Business owners are obsessed with them, with good reason. Controlling expenses is the simplest way to stay in business. Just because it is simple, does not mean it is always easy to do.
Key Issues - Owner Perspective:
To maximize the profit of any business the business owner must boost revenue while keeping expenses at a consistent level. Lowering the expenses of the business can help companies keep more of their Revenue. This brings us to the next accounting equation:
Revenue - cost of goods sold = gross income - expenses = net income or loss
Looking at this equation it is rather simple to see how minimizing a business’ expenses will increase the net income. However, cutting costs in the wrong places or too deeply may have overall negative effects on the longevity of the business. For example, using cheaper material to produce products may lead to more refunds and returns and a lower reputation.
Finding the right balance on where to spend, why to spend, and who to spend can mean the difference between a thriving fulfilling business and one that is a very expensive hobby.
What You Need to Know - The What
Businesses record transactions using either the cash basis or accrual basis. Under cash basis accounting, expenses are recorded when they are paid. In contrast, under the accrual method, expenses are recorded when they are incurred.
Expenses can be further subdivided into Operating Expenses and Non-Operating expenses. Operating expenses are expenses related to the main activities of the business : Rent, Utilities, Advertising, Office Supplies, Etc. Non-operating expenses include everything not directly related to the running of the business : Interest, investment losses, etc.
Operating expenses are the everyday living costs of the business and the majority of them are 100% tax deductible since they are “both ordinary and necessary”. As the saying goes, “It takes money to make money!” ( If you are a returning listener, you will know that I do not exactly subscribe to that theory… ha)
To find a list of “expenses” click here: https://www.beginner-bookkeeping.com/deductible-business-expenses.html
The truth is, mostly anything that is used for the business can be a business expense, as long as it is:
What You Need to Do - The How
Expenses are the largest portion of a business’ financial statements. Tracking these expenses can become overwhelming quickly. To make things just that much more fun, several expenses can fall into different categories depending on your industry.
Business expenses that can be deducted in the current year, such as: business travel, rents, utilities, supplies, insurance, wages, and tangible items with a useful life of no more than one year or cost less than $100 will generally be operating expenses. If you are new to business and do not know where to start, ask your local government! Or, you can google “business tax return” and your locality. This should bring up examples of what is an acceptable expense to keep track of.
Do not limit yourself with the general categories present in a tax return thou! A good sub-category strategy can break down the expenses to provide further detail. If you have a very large amount in a particular category, Office Supplies for example, you can add sub-categories by vendor, product, or reason ( where, who or why) of the expense.
Each month, quarter, or year, the expenses should be carefully examined for trends and opportunity. Compare the business’ expenses across periods to better understand the cash flow of the business and to better plan for large purchases in the future. Track expenses the same way you track your Revenue for net profit margins across your business. This is an easy way to get more depth out of your books and records.
Expenses are generally where the word budgeting comes into play often. Budgeting is making sure there is enough money ( or assets ) to accomplish a particular future goal set by the business. The goal could be anything and budgets can be made for individual projects, companies, or time periods.
By controlling, adjusting, and planning a business’ expenses the owner becomes more financially aware, intrinsically improves money management, has less stress and plays a crucial role in their tax process.
Previous: Expenses: The real cost of business
Next: PNL: The birth of a tax return
Written by Kash the bookkeeper
Check out the last QuickBooks Online Tutorial you will never need here! https://kashthebookkeeper.com/master-your-bookkeeping-in-60-minutes/
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