It can become a tedious process to track business expenses. It is easy to lose track or to forget to record an expense here and there. Inconsistent or incorrect tracking of expenses can lead to inaccurate data, which could result in stressful audits.
The good news is that expense tracking does not have to be a pain in the neck. You can create a system for tracking expenses that won’t take up all your time and cause you financial stress. Understanding how accounting works is the first step in building this system.
Understanding the Accounting Cycle
The accounting cycle starts when you perform a financial transaction. The transaction is recorded using a journal and posted to the general ledger. After all transactions have been posted, create a trial account. The trial balance can be used to create financial statements such as a cash flow statement, balance sheet and income statement. These statements will help you to determine the financial health of your company.
Take a look at the steps of the accounting process.
1. Create the chart accounts
The chart is an overview of the financial accounts of your company. The balance sheet accounts are listed first. These include cash and accounts payable.
Income statement accounts can also be called expense accounts. Typically, they are listed at the bottom of your chart of accounts. If you want more detailed expense reports, create separate expense accounts for your different spending categories.
2. Post a journal entry
Journal entries are used to record activity. journal entries are used to record activity.
Journal entries can be used to track expenses for your business. A debit entry will increase your expense account, while a credit entry will reduce cash. Each journal entry contains an explanation to make the analysis easier. All journal entries are posted to the general ledger.
3. Review of the trial balance and general ledger
A general leadger records every transaction. It is used to store and summarize financial transactions for a business. The Trial Balance summarizes the General Ledger. It is a list with accounts that are used to post transactions. The trial balance gives a snapshot of a company’s financial situation. General ledger provides more details.
4. Produce financial statements
The trial balance can be used to produce financial reports including a statement of cash flow, income statement and balance sheet. The financial statements are generated at the end each month, and the accounting cycle begins on the 1st of the next month.
Accounting cycle for tracking expenses
You must manually track each transaction. If you buy supplies from a supplier, you will need to track the expense accurately.
1. The invoice from the vendor can be filed as a document source.
2. Verify the entry in the general ledger by posting the journal entry.
3. Create a trial balance, and then post entries to adjust it.
4. You can use the adjusted trial balance when preparing financial statements.
5. Confirm that each account has been reconciled and that the vendor’s payment was made through the correct checking accounts.
This is the simplified version. Other transactions can be more complex and create additional obstacles, such as:
* Credit Card Transactions: You must check the credit card statement if you pay for business expenses with a credit card. You must post each expense to the right account and make your credit card payments promptly to avoid interest or penalties. Late payments can affect your credit score.
* Card activity: Payments made with a debit card should be posted in the appropriate expense account. Checkbook impact of debit transactions
Personal capital contributions. In order to record capital contribution to your business you may need more cash, assets, and equity. The contributor will also need to keep track of their personal capital in order to accurately report their ownership interest on personal tax returns.
Accounting cycles are a useful tool for accurately tracking business costs. It’s a tedious and time-consuming process, especially if the expenses aren’t clear. There are ways to make the process easier.
How to track expenses more efficiently
Using spreadsheets to track expenses leaves you open to costly accounting mistakes and errors. These problems can be avoided by following these tips. Click to Tweet
1. Automate your expense tracker
Invest in Accounting Software to do the heavy lifting. Accounting software will connect directly to your bank account to automatically import and categorize business expenses. You can generate financial reports easily, track your expenses and organize your books with all your financial information in one place.
Accounting software can help you grow your business faster. You’ll also need to record more transactions as you grow. Accounting software helps you process more transactions faster so that you can do more business.
2. Hiring a bookkeeper
A professional accountant will be able to track and manage the various moving parts in the accounting cycle, including the expense tracking. A professional bookkeeper can help you generate accurate financial reports and data. Hiring a full-time accountant can be costly for new businesses. Consider hiring a bookkeeper for a few accounting tasks if you are not yet ready to make the jump. Virtual Bookkeeping allows you to contact a bookkeeper when you are in need.
3. Use a business account
Separate bank accounts make it easier to track business expenses. A bank account will allow you to monitor business expenses and create realistic budgets without being distracted by personal finances.
It’s also a good idea for receipts related to business purchases to be stored and organized. Just don’t just throw them into a shoebox without any rhyme or reason. Storing receipts allows you to keep track of how much money you have spent, and also makes it easier for you to keep track of business expenses in the future. Store paper receipts by month in folders or digitally store them online.
4. Consistency is key
Tracking expenses is a good idea. If you don’t log your transactions and organize your books regularly, expenses can quickly get out of control. Bookkeepers suggest updating your books once a week. Your financial data will be more accurate if you track your expenses consistently. You’ll also spend less time digging through old transactions.
Manage expenses effectively can make or ruin your business. It’s important to evaluate your existing expense tracking system once you have a better understanding of the accounting cycle. These tips will help you streamline your tracking of expenses and get a better picture of your company’s finances.