Grande Prairie is home to some of the highest rates of entrepreneurship. Being in the finance industry ourselves, the team here at McNabb Lucuk LLP understands how crucial bookkeeping is in running a financially responsible business. By systematically recording and organizing financial transactions, bookkeeping allows businesses to track their financial health, make informed decisions, and meet regulatory requirements. To accomplish this, bookkeepers use various categories and types of financial accounts to ensure accurate and comprehensive record-keeping.
As promised in our recent blog, “Why Bookkeeping is Essential”, this month’s blog gives recommendations on classifying transactions and the types of financial accounts that are most common for business.
Types of Financial Accounts
Financial accounts can be broken down into a few main categories on a chart of accounts. These are:
- Revenue Accounts: Used to track income generated by the business from sales, services, interest income, licensing and other income earned.
- Expense Accounts: Used to record costs incurred to operate. Typically a business will have more expense categories than revenue sources.
- Cost of Goods Sold (COGS): Used specifically for businesses that produce products or purchase inputs, such as parts, materials, and labour, to generate the goods sold.
- Accounts Payable: Used to track anything owed to suppliers, subcontractors and creditors for goods or services.
- Accounts Receivable: Used to show what is owed to the business by its customers or clients for goods or services provided on credit.
- Cash: Used to show where cash is flowing in and out of the business. Cash flow can signal the level of liquidity.
- Loans Payable: Used to track the balances on business loans.
Next, we’ll explore the common categories for classifying the transactions that fall into each of these account types.
Classifying Expenses
The categorization of transactions through bookkeeping enables business owners and their financial teams to understand the financial health of the business by grouping similar records. Below are common categories to include when setting up bookkeeping:
- Advertising & Promotions – Applies to expenses related to marketing the business, such as flyers, digital ads, marketing consultants, trade show fees and branded materials.
- Bank Charges and Interest – Use this category for any bank fees and interest incurred or earned. A separate interest category can be beneficial if the debt is a significant cost to a business.
- Cost of Sales – These are non-marketing related costs of making sales or providing a service. These include costs of products sold, shipping expenses or costs related to providing services such as labour or materials.
- Furniture and Equipment – For non-consumable office items that are expected to last longer than one year.
- Insurance – Includes general business liability, professional liability, errors and omissions, property insurance, and potentially vehicle insurance.
- Inventory – Items purchased or manufactured for resale. A retailer buying a pallet of shoes for the sales floor is incurring an inventory expense.
- Meals and Entertainment – This expense has unique tax deduction rules. Include only meal and entertainment costs related to business activities, such as hosting a client meeting over coffee or bringing in lunch for staff during a team-building event.
- Licenses and Dues – Any costs associated with obtaining the legal rights to use intellectual property, technology, or assets, including logos. Include membership fees paid to trade associations or industry groups in this category.
- Office Expenses – Use for consumable office items that last less than one year, such as stationary, printer supplies, and coffee supplies. Phone, internet and cleaning services would fall under their respective categories for utilities and professional fees.
- Professional Fees – Cleaning services, lawyers, accountants, security and technical support are all common expenses in this category.
- Rent or Lease – Rent paid for an office or retail space, storage unit, commercial or industrial yard or shop. This can also include rentals or leases on equipment or tools or the category can be further broken down.
- Sales – Revenue from selling products or services can be put into a singular sales category or broken down into sub-categories to track differences in revenue generation.
- Software Subscriptions – Can be thought of as intangible technology such as web hosting, email accounts, virtual meeting platforms, sales system and accounting software.
- Subcontractors – When hiring other businesses to perform work on your behalf, include those transactions here.
- Travel – Use Travel to classify expenses incurred when leaving the area where the business operates. Flights, hotels, car rentals, parking, taxis and ride-sharing are examples.
- Utilities – Include phone plans, internet, electricity, natural gas, heating and cooling under this expense category.
- Vehicle Expenses – Operating costs for vehicles used in the business. Some examples include fuel, licensing costs, vehicle insurance, and repairs.
- Wages and Benefits – These can be lumped together or subcategories can be created to differentiate salaries/wages, CPP, EI, and any employer-paid employee benefits
Although these categories are widely used, they are not an extensive list. We recommend adding and customizing expense categories to ensure bookkeeping aligns with business goals and to include the level of detail desired by the individual business.
For example, a business with a large fleet may need to break down vehicle expenses into many subcategories, such as tires, fuel, insurance, preventative maintenance, parking, and repairs. Whereas an entrepreneur without a company vehicle may choose “Transportation”.
By maintaining these bookkeeping categories and financial accounts, businesses can accurately report their financial position, analyze performance, and plan for the future. Reliable bookkeeping lays the foundation for sound financial management and supports the growth and success of the business. If you’re struggling to understand your bookkeeping or are considering outsourcing this essential business service, give us a call at McNabb Lucuk LLP in Grande Prairie.