By Ken Boyd –
Tracking business expenses can be a lengthy process — and it can get out of hand quickly. It’s easy to lose track of your expenses or forget to record a transaction here and there. But inconsistent or incorrect expense tracking leads to inaccurate data that can result in stressful financial audits.
Here’s the good news: Expense tracking doesn’t have to be a thorn in your side. It’s possible to create an expense tracking system that doesn’t eat up your time or cause financial stress. The first step towards building this system is understanding how the accounting process works.
Understanding the accounting cycle
In a nutshell, the accounting cycle begins when you make a financial transaction. Record the transaction using a journal entry and post it to the general ledger. Once all transactions are posted, generate a trial balance. You can then use the trial balance to produce financial statements, including a balance sheet, income statement, and cash flow statement. These statements help you determine the financial status of your business.
Let’s take a closer look at each step of the accounting cycle.
1. Create the chart of accounts
The chart of accounts is a list of your business’s financial accounts. Balance sheet accounts, such as cash and accounts receivable, are listed first, followed by income statement accounts.
Income statement accounts are also known as expense accounts. They are typically listed toward the bottom of the chart of accounts. You should create expense accounts for each of your spending categories if you want to have more detailed expense reports.
2. Post a journal entry
A journal is a record of each business transaction that occurs, listed in chronological order. Activity is posted using a journal entry.
Think of journal entries as expense trackers for your business. A debit entry increases expense accounts, and a credit entry reduces cash. To make analysis easier, each journal entry includes an explanation of the transaction. All journal entries post to the general ledger.
3. Review the general ledger and trial balance
A general ledger is a record of every posted transaction. It’s used to sort, store, and summarize a company’s financial transactions. The trial balance, which summarizes the general ledger, is a list of accounts used to post transactions and their current account balances. The trial balance provides a snapshot of the company’s current financial condition. For more detail, turn to the general ledger.
4. Produce financial statements
The trial balance is used to generate financial statements, including a balance sheet, income statement, and statement of cash flows. Financial statements are produced at the end of each month and the accounting cycle starts over on the first day of the following month.
Tracking expenses using the accounting cycle
There are a number of steps you must take to manually track expenses each time a transaction is completed. For example, if you purchase supplies from a vendor, you’ll need to do a few things to accurately track your expense:
1. File the vendor’s invoice as a source document.
2. Post the journal entry and review the general ledger to verify that the entry is correct.
3. Generate a trial balance and post entries to adjust the trial balance.
4. Use the adjusted trial balance to produce financial statements.
5. Reconcile each of the accounts and confirm that the vendor was paid through the correct checking account.
That’s the simple version. There are also more complicated transactions that can create additional hurdles, including:
• Credit card transactions: If you pay business expenses by credit card, you must review the credit card statements. Each expense must be posted to the correct account, and you must make credit card payments on time to avoid paying interest or penalties. Late payments will impact your business’s credit score.
• Debit card activity: Payments using a debit card must be posted to the correct expense accounts. Debit transactions impact your checkbook.
• Personal capital contributions: To record capital contributions to your business, you might increase your cash, asset, and equity accounts. Additionally, the contributor must carefully track their personal capital balance to report ownership interest on their personal tax returns.
The accounting cycle is an important tool when it comes to accurately tracking business expenses. But it’s a time-consuming and unforgiving process — especially if those expenses aren’t straightforward. Fortunately, there are a few ways to smooth out the process.
4 ways to streamline expense trackingTracking expenses using manual processes, like spreadsheets, leaves you vulnerable to accounting errors and costly mistakes. You can avoid these problems using the following tips. Click To Tweet
1. Automate your expense tracking
Invest in accounting software that does the heavy lifting for you. Most accounting software connects directly to your business bank accounts to import and categorize expenses automatically. With all your financial data in one place, you can easily generate financial reports, track expenses, and keep your books organized.
Accounting software can also help you scale your business more efficiently. As you grow, you’ll need to post more transactions. Accounting software allows you to process more transactions in less time so you can take on more business.
2. Hire a bookkeeper
A professional bookkeeper can track and manage all the moving parts of the accounting cycle — including your expense tracking. They can also help to ensure that you’re generating accurate data and financial reports. Of course, hiring a full-time bookkeeper can be expensive for new businesses. If you’re not ready to take the leap, consider hiring a part-time or contracted bookkeeper to take some accounting tasks off your plate. Virtual bookkeeping services allow you to connect with a bookkeeper online when you need them most.
3. Use a business bank account
Tracking business expenses is easier when you keep your personal and business finances in separate bank accounts. A business bank account allows you to easily monitor your business spending and build realistic budgets that are unclouded by personal finances.
Additionally, it’s a good idea to store and organize receipts for business-related purchases — just don’t store them in a shoebox with no rhyme or reason. Storing receipts helps you track how much you’ve spent and makes it easier to track business expenses over the long term. You can store paper receipts in file folders organized by month or create digital copies to store online.
4. Be consistent
It’s best practice to track all expenses as they happen. Expenses can easily get out of hand if you forget to log transactions or don’t organize your books consistently. Bookkeepers recommend updating your books at least once a week. The more consistent your expense tracking, the more accurate your financial data — and the less time you waste digging through old transactions.
Managing expenses can make or break your business. Once you understand the accounting cycle, it’s a good idea to assess your current expense tracking system. Use these tips to streamline your expense tracking processes and gain a clearer picture of your business finances.
About the Author: Ken Boyd is co-founder of AccountingEd.com and owns St. Louis Test Preparation (AccountingAccidentally.com). He provides blogs, videos, and speaking services on accounting and finance. Ken is the author of four Dummies books, including “Cost Accounting for Dummies.”