When it comes to managing your finances, categorizing transactions in your bank feed is crucial. While A/R (Accounts Receivable) and A/P (Accounts Payable) are important, not every transaction will fall under those categories. Many small business owners struggle with classifying income and expenses that don’t directly tie to customer invoices or vendor bills.
In this post, we’ll go over simple ways to categorize other income and expense transactions, ensuring that your books stay in order and your financial reports remain accurate.
Categorizing Income Transactions
Income isn’t always from sales or invoiced services. You may have other forms of deposits coming into your account, such as interest, refunds, or miscellaneous revenue. Here’s how to handle those:
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Business Income (Not Invoiced):
Sometimes, you may receive payments for services or sales that were not previously invoiced, such as cash sales or direct deposits from online platforms (e.g., Shopify, PayPal, etc.).-
Categorize this as “Sales” or “Revenue” in your bookkeeping software.
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Ensure it’s placed under the correct income category, like “Services” or “Product Sales,” so your profit and loss reports accurately reflect your revenue streams.
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Interest Income:
If your business checking or savings account earns interest, this will appear as a deposit in your bank feed.-
Categorize it as “Interest Income” and make sure it’s tracked separately from your core sales revenue for better reporting.
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Refunds or Credits:
You may receive refunds from vendors or credits for overpayments. These need to be recorded properly.-
For a vendor refund, categorize it as “Expense Reimbursement” or “Vendor Refund” and match it to the related expense account.
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If it’s a customer refund for overpayment, categorize it as a reduction to your income.
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Miscellaneous or Non-Operating Income:
Sometimes, you might receive income that doesn’t directly tie to your business operations, like selling equipment or receiving rebates.-
Categorize these under “Other Income” or “Non-Operating Income,” ensuring they don’t skew your main business earnings.
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Categorizing Expense Transactions
When expenses appear in your bank feed, especially those not tied to A/P or vendor bills, it’s important to categorize them accurately. Here’s a breakdown of some common expenses:
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Operational Expenses:
These are everyday costs to run your business, like utilities, office supplies, or rent. Look for recurring or expected payments.-
Match these payments to appropriate categories such as “Utilities,” “Office Supplies,” “Rent,” or “Advertising.”
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This ensures that your income statement provides a clear view of your business overhead.
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Meals and Entertainment:
If you’ve taken a client out for lunch or attended a networking event, this expense needs to be recorded in a specific category.-
Categorize these transactions under “Meals and Entertainment” and make sure to adhere to tax guidelines on deductions for business meals.
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Subscriptions or Software:
If you pay for recurring business software, subscriptions, or online services (e.g., QuickBooks, Google Workspace), these should be categorized properly.-
Use “Software” or “Subscriptions” to track these expenses. This helps you monitor costs tied to operational efficiencies.
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Bank Fees and Service Charges:
Every business incurs some form of bank fees, whether they are monthly service charges, wire transfer fees, or overdraft fees.-
Categorize these under “Bank Fees” or “Service Charges” to ensure that these costs don’t get lost in your overall expense reporting.
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Owner Draws or Personal Expenses:
If you’ve accidentally used your business account for personal purchases, you’ll need to categorize these correctly so they don’t show up as business expenses.-
Categorize personal expenses as “Owner’s Draw” or “Personal Expense,” keeping them separate from actual business expenses for clear bookkeeping.
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Loans or Credit Card Payments:
When making payments to reduce your loan or credit card balances, don’t categorize them as “Expenses.”-
Instead, categorize loan payments as “Loan Payable” or credit card payments under “Credit Card Liability” to accurately reflect debt reduction on your balance sheet.
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By properly categorizing income and expenses, you can ensure that your financial records are accurate and complete. This makes it easier to prepare for taxes and track your business’s profitability throughout the year.
Stay tuned for more tips in our “Simplifying Your Bookkeeping” series!