Listing expenses by categories can be useful for reporting purposes and operations analysis of your business. However, there is no black-and-white rule creating a list of expenses. The fewer number of categories may not be suitable to obtain useful information, while having too many categories may create an overwhelming amount of information to process. This post is aimed to help you in creating the list of expense categories for analysis and reporting purposes.
One Step at a Time: Direct vs. Indirect
First, let’s create two groups of expenses: direct and indirect. Expenses that vary with the change in revenues, and can be directly traced to the revenues, fall under direct expenses. For example, Direct Materials – is the expense that typically changes with the change in revenues. So, direct expenses typically change with the volume of business operations.
In contrast, there are expenses that do not change with the volume of business operations, or their change cannot be traced to the change in revenues. Such expenses fall under the indirect category. Example: office rent, hydro and utilities.
Populating the List of Expenses
Now, we can start making a list of expenses. Each expense item has to be distinct and material in value. For example, if the business incurs large volume of various Office Expenses, then such item should be created. For instance, office related expenses could consist of several smaller expenses such as Supplies, Telephone, and Utilities. However, it is possible for any of them to accumulate into a large number; then, the separate category would be recognized. The rationale is to have a detailed and finite list of expenses, and not end up having unnecessarily many expense categories at the same time.
Adopting Initial List of Expenses
While several expenses can be specific for the particular type of business, some of them can be generic. In this case, one can start from the generic template, and then add/remove expense categories as needed. For example, the following list can be used as a starting point:
Management and administration fees
Accounting and other professional fees