Keeping business expenses in check ensures that your money is going in the right place. Every business incurs a certain amount of expense that may cover manufacturing, marketing, rent, payroll, and others. You can claim some expenses as a deduction while filing income tax returns. This helps reduce your taxable income. Thus, it is important that you have a clear understanding of what business expenses are, how to record them and which are tax-deductible. According to professional accountants, managing expenses is the first step towards maximizing profits. 

What are Business Expenses?

An expense is an essential cost that’s used to run your business. In other words, it’s the operating cost that helps the business generate revenue. 

There are two types of expenses- fixed and variable. Fixed expenses do not change. Examples include insurance or rent. Variable expenses often change. Examples include shipping costs, sales commissions, etc. 

You can also consider business expenses as deductions. Accountants record them on an income statement. They subtract the amount from total revenue to calculate a company’s net taxable income and profit/loss. You can, however, report deductible expenses to the CRA, which helps reduce tax liability. These deductible expenses are ordinary, necessary and relevant to your business operations. 

Also Read: Accounting and Bookkeeping in Manitoba

What are the Deductible and Non-Deductible Expenses?

Here are some examples of expenses that are fully or partially deductible.

• Commissions 
• Marketing 
• Advertising 
• Employee benefits 
• Furniture 
• Legal fees 
• Educational expenses for employees 
• Insurance 
• Rent and utilities 
• Mortgage payments 
• Office equipment and supplies 
• Business mileage 

Here are some examples of expenses that are not tax-deductible. 

• Lobbying costs 
• Educational expenses 
• Government penalties
• Demolition losses 

This is just a glimpse of what you can claim as a deductible expense and which ones are non-deductible. An experienced accountant is the best person to guide you through all the deductible expenses relevant to your business niche. 

What are the Different Types of Expenses?

Business expenses are divided into two categories-

Operating expenses- This refers to all costs related to the company’s main financial activities. Examples include costs of goods sold, direct labour, rent, etc. The expenses occur on a daily basis to run the business.  

Non-operating expenses- This refers to any expenses that occur outside of the company’s daily financial activities. Interest charges are the most common examples. Accountants use non-operating expenses to figure out the company’s earnings from its core activities.   

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How are Expenses Recorded in Accounting?

Businesses record their expenses in the income statements. Accountants do so using any one of the following accounting methods. 

• Cash basis method– Accountants record the expenses after clearing the invoice. 
• Accrual basis method– Accountants record the expenses when the company receives the service. 

Let’s say a company hires a cleaning company to clean the office. If they use the cash-based accounting method, they record the expense after paying the cleaning company’s invoice. In the case of accrual accounting. They record the expense once the cleaners start working. 

Need Help with Tracking Business Expenses?

Tracking and managing business expenses can help reduce your tax liability. You can hire experienced accountants who can keep detailed, accurate records of expenses and save you time. Whether you have a small business or a startup, keeping accurate expense records can help you maximize your profits without risks. 

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