How to Categorize Your Business Expenses Correctly

Rentals, office supplies, utilities, and materials are just some common expenses that you probably encounter most of the time to keep your business running smoothly. They may seem typical words but categorizing your transactions under these words can be a little confusing.
How should you record your travel costs to meet a client? What type of expense is computer software? What category does a printer belong to?
These questions have probably crossed your mind. And now you have realized that categorizing your business expenses requires judgment and sufficient understanding.
In this article, we will guide you on how to categorize your business expenses the right way.

How to Categorize Your Business Expenses Correctly

Categorizing your business expenses can give you a headache if you have no idea what kind of expense a transaction is. This is why you need to understand the transaction first and foremost. Basically, your business spending correlates to what type of industry your company belongs to. Before recording your expense, it will be helpful if you answer these questions:

Is this transaction for business operations?

What is the purpose of the spending – is it an office expense, inventory, or purchase of materials?

Now that you have an idea about the transaction, you can begin to classify it and determine its expense category.
Essentially, business owners create their own categories to easily identify an expense. However, it is always better to establish a list of expense categories compliant with the BIR. There are specific expenses that can be used to deduct your gross income for the computation of your tax dues. These expenses are called Allowable Deductible Expenses.
BIR has always been specific to its rules when it comes to allowable deductions. You can create your own label of expense, but they should be:
  1. In connection to your business trade or profession
  2. Ordinary and necessary expenses that your company has paid or has incurred during the taxable year
  3. Wages or salaries for services rendered and has incurred for the company’s trade or profession
  4. Rentals for your business
  5. Interests paid or incurred within the taxable year related to your business finance operations
  6. Recreation spending but do not exceed the ceiling requirements of the BIR
  7. Taxes, losses, bad debts, depreciation, research and development expenses, donations, or other contributions

What Are the Typical Business Expense Categories

As mentioned above, you can label your own business expenses as long as they are BIR compliant. You can create simple categories to easily classify your expenses. You can use the following expense categories:
  1. Communication Expense
  2. Construction and Repair
  3. Cost Of Goods and
  4. Services – Foreign
  5. Cost Of Goods and
  6. Services – Local
  7. Electricity
  8. Food and Drinks
  9. General Expenses
  10. HDMF
  11. Health Expenses
  12. Internet
  13. Labor and Services –
  14. Foreign
  15. Labor and Services – Local
  16. Landline
  17. Logistics
  18. Mobile Load
  19. Official Documents
  20. Online Purchase
  21. Online Subscriptions
  22. Pantry Supplies
  23. PhilHealth
  24. Rentals
  25. Salary As COGS
  26. Salary As Overhead
  27. SSS
  28. Stationery and Supplies
  29. Training and Seminar
  30. Transport
  31. Vehicle Fuel
  32. Vehicle Maintenance
  33. Vehicle Toll Parking
  34. Water Bill
  1. Communication Expense
  2. Construction and Repair
  3. Cost Of Goods and Services – Foreign
  4. Cost Of Goods and Services – Local
  5. Electricity
  6. Food and Drinks
  7. General Expenses
  8. HDMF
  9. Health Expenses
  10. Internet
  11. Labor and Services – Foreign
  12. Labor and Services – Local
  13. Landline
  14. Logistics
  15. Mobile Load
  16. Official Documents
  17. Online Purchase
  18. Online Subscriptions
  19. Pantry Supplies
  20. PhilHealth
  21. Rentals
  22. Salary As COGS
  23. Salary As Overhead
  24. SSS
  25. Stationery and Supplies
  26. Training and Seminar
  27. Transport
  28. Vehicle Fuel
  29. Vehicle Maintenance
  30. Vehicle Toll Parking
  31. Water Bill

What Happens When You Miscategorized Expenses

Categorizing expenses incorrectly is the most common error of many businesses. Some owners often mix up their personal and business expenses. For example, you bought home supplies, but you accidentally declared them as office supplies. This will have an impact on your financial reports. It will overstate your total expenses, hence showing an understated total profit and tax dues.
Another scenario is when you recorded your materials as Office Supplies instead of Purchases as part of Cost of Goods Sold. It can result in an overstated gross income because of an understated Cost of Goods Sold. Therefore, it will affect your financial budgeting, and you most likely create a wrong forecast and analysis.

Optimize Your Record-keeping by Auto-categorizing Your Business Expenses

Doing all these tasks of recording and classifying your expenses by yourself will surely take a big chunk of your time. Of course, you still need to manage your business operations to continuously get leads and serve your clients. As a small business owner, you probably thought of optimizing your record-keeping of expenses.
Well, the good news is you can now automate this process with the help of Olivia.
Olivia is an application designed for businesses that automate common and tedious processes such as the record-keeping of expenses. It has an intelligent data capture that could read your receipts and data fields in real-time.
Details including the Date, Amount, VAT, and Vatable amount automatically populate the data fields once you scanned a receipt. But one of the best features of Olivia is it can also auto-categorize each receipt you capture. Additionally, it is optimized for the Philippine business settings, thus complying with the rules and policies of the BIR.
What if the Olivia app does not recognize the merchant in the scanned receipt, is there any other way to manually input the expense in the app?
– Yes, you can still manually enter your expense in the data fields that the scan did not capture. Olivia app has flexible features that you can always use to keep your records accurate and up-to-date.
Can I edit or add expense categories in the Olivia app?
– You can edit expense categories by selecting from the list available. However, you can’t add more expense categories.
If for example, I scanned a receipt from a restaurant that should be a company’s representation expense, but the app categorized it as Food and Drinks, can I edit the category manually?
If a certain category does not exist, or you prefer a specific expense category, you can always input remarks indicating the expense that you use in your business. In the example mentioned, you can still use the Food and Drinks category with remarks of “Representation expense”.
Can the Olivia app split expenses and make multiple categories using one receipt?
– As of now, Olivia can only auto-classify one category per receipt. In case you have multiple expense categories in one receipt, you can put remarks specifying the other expenses or details.

Conclusion

Automating your expense record-keeping will save you from manual data work. With Olivia, you can commit yourself freely to your business operations, and you can focus on the meaningful tasks that require more attention.
Optimize your processes with Olivia now and request a demo today.