Categorizing Transactions: Why Does it Matter?

When completing bookkeeping for your business, accurately categorizing your transactions is crucial. You want to ensure that you separate your income from your expenses, and then organize them into subcategories. When your books are detailed, it leads to clearer financial reports, ensures you are maximizing tax savings through tax deductions and write-offs, and can make future business planning easier.

For example, if you own a coffee shop and your business sells different kinds of drinks, pastries, and even coffee beans, you may want to separate these income transactions into different categories to see which products are selling the most. Similarly, when purchasing inventory such as syrups, milks, or baking items, you may want to separate these expense transactions to see which inventory items you are spending the most on. This example also highlights one reason why it is so important to keep receipts of all your transactions. Your business’s books are only as detailed as you make them. Sure, you can just categorize all the items you purchase for your business under inventory. And yes, you can just categorize all income into one category. Or, you can have multiple inventory and expenses accounts, which will only benefit your business and improve its financial health.

Detailed, clean books can provide a deeper insight into the operations of your business by providing accurate financial statements that report on your business’s performance and financial position. With this information, you can create future budgets and financial forecasts, like deciding where to increase or decrease spending, and where to focus marketing and advertising efforts.

Additionally, you can maximize your tax deductions and write-offs when your expenses are categorized accurately. Some expenses are 100% deductible, like office rent or supplies. Other expenses are partially deductible, like meals and entertainment. There are also expenses that need to be amortized or depreciated over time, typically expenses like equipment or vehicles. Detailed books come in handy when you are trying to maximize your tax savings.

Overall, tracking and categorizing your business transactions are important for these three main reasons: detailed financial reports, straightforward budgeting and forecasting, and maximum tax savings.

Although you can do your own bookkeeping, if you’d like to save the headache of figuring out how to categorize your transactions, reach out to us today to schedule a meeting and receive a free quote on bookkeeping services.