{"id":18359,"date":"2024-05-28T16:09:23","date_gmt":"2024-05-28T14:09:23","guid":{"rendered":"https:\/\/www.n2f.com\/blog\/?p=18359"},"modified":"2024-10-18T14:55:29","modified_gmt":"2024-10-18T12:55:29","slug":"entrepreneur-101-understanding-business-expenses-and-accounting-basics","status":"publish","type":"post","link":"https:\/\/www.n2f.com\/blog\/en\/entrepreneur-101-understanding-business-expenses-and-accounting-basics\/","title":{"rendered":"Entrepreneur 101: understanding business expenses and accounting basics"},"content":{"rendered":"\n

Making the transition into entrepreneurship is new and exciting. After all, you probably dreamed about becoming your own boss and pursuing your business ideas. However, running a business is much different than being an employee of an organization.<\/p>\n\n\n\n

One of the fundamentals of becoming a successful entrepreneur is understanding business expenses and accounting basics. In this article, we\u2019ll explore both of these concepts in more detail, helping you solidify your accounting foundation.<\/p>\n\n\n\n\n\n\n\n

Understanding business expenses<\/h2>\n\n\n\n

Business expenses are costs related to generating revenue. This could be raw materials that you turn into finished goods, business insurance, or wages. To be deductible, the cost must be directly connected to your business activities. This means that groceries for your family wouldn\u2019t be a qualifying expense. Here is a list of qualifying business expenses:<\/p>\n\n\n\n

– Advertising
– Bank charges
– Interest expense
– Licenses
– Insurance<\/td>		– Employee benefits
– Wages
– Travel
– Taxes
– Utilities<\/td>		– Rent
– Legal and professional fees
– Depreciation
– Repairs<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n

This list isn\u2019t comprehensive, meaning you might incur qualifying expenses outside of this list. The industry you operate in will help you determine what expenses are deductible. For example, if you run a software startup, you most likely won\u2019t be paying for raw materials.<\/p>\n\n\n\n

Moreover, it\u2019s crucial that you differentiate between business and personal expenses. When entrepreneurs first start out, they tend to comingle business and personal transactions. This can break your liability shield, putting your personal assets at risk if your business were to be sued.<\/p>\n\n\n\n

Categorizing and tracking the cost-effectiveness of expenses<\/h2>\n\n\n\n

Expenses directly impact your bottom-line profitability, known as net income. This makes it important to properly categorize and track the cost-effectiveness of your business expenses. First, you should have a business bank account that houses all of your transactions. Most accounting software programs give you the ability to link your bank account, seamlessly flowing transactions into your ledger.<\/p>\n\n\n\n

Next, you should retain the proper documentation for each expense. Many regulatory agencies will not accept bank statements as sufficient proof that the expense is qualifying. Instead, they need an invoice or receipt that outlines the cost and description of each item purchased. The more information you can store about your business expenses, the better.<\/p>\n\n\n\n

Additionally, the information in your accounting system will help you track the cost-effectiveness of expenses. Maybe you find that you are overpaying for materials. Can you switch suppliers or negotiate a new vendor contract? With information at your fingertips, you can gather insights into profitability and where changes might be needed.<\/p>\n\n\n\n

The main financial statements<\/h2>\n\n\n\n

The expenses of your business flow through to your financial statements. There are three main financial statements: the income statement, the balance sheet, and the statement of cash flow. Let\u2019s explore each of these documents in more detail:<\/p>\n\n\n\n

Income Statement<\/h3>\n\n\n\n

The income statement outlines the profitability of your company for a certain period of time. This report is where you will find all of your business expenses. There are a few main categories on the income statement, including:<\/p>\n\n\n\n