Bookkeeping Tips: Coding Business Expenses!

Quick tips to navigate Cost of Goods Sold (COGS) and Operating Expenses. Think Pizza!

Bookkeeping can get complicated but NOT Pizza (Just hang in there, pizza will make sense soon)! While there are different accounts to code your business expenses, you may ask yourself, is it Cost of Goods Sold? Or is it an Operating expense?

Let’s face it, not everyone has an accountant or bookkeeper doing the coding so here is the first bookkeeping post designed to help you decipher the different expense accounts!

Let’s discuss Cost of Goods Sold first, shall we?

What is COGS?

“Cost of goods sold is the total of all costs used to create a product or service, which has been sold” ( www.accountingtools.com).

Going back to my college days, my cost accounting professor used the analogy of someone owning a pizzeria when she taught us COGS. (See, told you pizza would make sense!). For example, the ingredients: creamy alfredo sauce, gooey mozzarella, feta cheese, spinach and the flour are all considered COGS because they make up or directly relate to the product you would be selling, the PIZZA!

So, when coding those transactions/ expenses, you could have an account in the chart of accounts named “supplies & materials” under the COGS account. Though Cost of Goods Sold is an expense account, not every expense goes into this category. Only those expenses you purchase that directly relate to the product or service you're selling. The other items could fall under operating expenses.

What are Operating Expenses?

“Operating expenses, more commonly known as OPEX, are the indirect expenses incurred to keep a business operational and running” (www.wikiaccounting.com).

This could be your office supplies, payroll, rent, advertising etc. Basically, anything that is not directly related to making the product or service you provide but is necessary to running the business.

You can also think of operating expenses in terms as business expenses.

Closer LOOK: IRS Insights

For instance, in the IRS publication 334 it states, “You can deduct the costs of operating your business. These costs are known as business expenses. These are costs you do not have to capitalize or include in the cost of goods sold but can deduct in the current year. To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your field of business. A necessary expense is one that is helpful and appropriate for your business. An expense does not have to be indispensable to be considered necessary” (IRS.gov, Publication 334 “Tax Guide for Small Business (For Individuals Who Use Schedule C)”).

Overall, we hope this short post helps you navigate and understand the differences of COGS and Operating Expenses when you are coding those business transactions!

** DISCLAIMER: This blog is not intended to give you any tax or legal advice just a guide to help.

Works Cited:

www.wikiaccounting.com

www.accountingtools.com

IRS.gov

pexels.com