It is very common for new bookkeepers and business owners to agonise long and hard about which account codes to use when you start doing your own bookkeeping or take on a new client ...
Most expenses will need to be put to a code in the profit and loss account. In Sage this means a code of 5000 or above and in Xero, it tends to be 300s or 400s. My first point is that you don't put expenses to a sales or revenue code (4000s in Sage, 200s in Xero). The first rule of thumb is that money you receive and money you spend should be split unless it is a refund.
So, now you need to decide if the item or service you have paid for is a direct cost or an expense:
- Direct Costs are wholly related to the product or services that you offer. It might be something you buy in so you can sell it, or if you provide training or courses it might be the cost sf creating and printing the workbooks you give to attendees.
- Expenses are more the general costs of running a business. Back office or admin costs or things you buy which are more generally used for the business, but not specifically related to sales.
You can see already from the way I am describing this that there are woolly areas and areas open to interpretation in deciding if what you have bought is a direct cost or an expense. My biggest piece of advice is to decide what makes sense to you for your business or your clients business and stick to it.
With my example of web hosting, if your website has a shop that customers use to buy from you, you can call that a direct expense and any costs involved with designing, creating and hosting or maintaining the website can use a direct cost code (6000s in Sage, 300s in Xero).
However, if the website is just a brochure site with contact details then it could be argued it is more an admin expense, or even sales and marketing. The secret though is you decide for your business and the best thing to do is be consistent.
What this means is all those related costs will all come down to being one number in the accounts at the end of the year and if, in hindsight, your accountant or you as a business owner decide that you have used the wrong area, it is really easy to adjust the figures for the purposes of your year-end accounts.
With something like web costs, if you have spent thousands on developing a website which is at the centre of your business the accountant might decide to 'capitalise' the costs and then 'depreciate' them over the likely lifetime of the website. This will mean the costs will need to be moved to a different code, but that decision can be made when looking at your year-end accounts rather than when you are paying for everything and entering the invoices. As long as you have picked a single code to put all the costs, the numbers can be moved to a more appropriate place later.
If the cost is a one-off and won't be used again, or is a really small amount and you really can't work out where to put it, then most accounts packages have a general expense or a miscellaneous area you could use. If you are using general expenses for lots of different items though, you won't be able to get much meaningful information about where you are spending your money from your accounts, and I would suggest that if you are wanting to grow and keep control of your business you rethink the account codes you are using and create (or start using) codes which will help you see what you are spending money on as a business.
And if you are at the stage in your business where you want to use your bookkeeping figures to analyse and make important decisions about where you are spending your money then it might be the right time to have a review of what codes you are using and how you are using them.
We can go through this together in one of my handholding sessions so your accounts can work for your business rather than your bookkeeping being done just for your tax return or accounts production.
If anything I've written here resonates with you, call me on 01604 420057 and let's see how we can help you.