Categorizing Transactions

Categorizing financial transactions properly is indispensable in:

• scrutinizing financial ratios and operational efficiency

• knowing where and how much is spent to operate your company

• making robust and savvy profit decisions

• analyzing cash flow

• organizing all the deductions you’re due

• paying the appropriate amount of taxes

• tracking reimbursable expenses

Categorizing transactions INCORRECTLY, INCONSISTENTLY, and INACCURATELY has serious consequences and begins when the accounting software is set up with the default chart-of-accounts category list straight out of the box. Misclassifying transactions using the one-size-fits-all default category list is the biggest cause of pesky errors that require costly and time-consuming clean up.

Before posting any transactions, it is best to consult Books Done Right, a QuickBooks Certified ProAdvisor, to review and customize the default category list to fit your specific business.

Be aware. Posting expenditure transactions can be confusing. For tax purposes it is critical to know whether the transaction falls under an overhead expense, or a direct expense, or whether it is an asset subject to depreciation. Keep in mind that every transaction must be assigned to the specific and appropriate expense category according to its tax treatment.

Then there's the most common mistake made by many business owners. They pay for business expenses out of their own pocket and neglect to record and track the reimbursable expenses. Consequently, they forfeit legitimate tax deductions and fail to reimburse themselves.