Ever wonder how you properly record business related expenses when starting a business? Many first-time entrepreneurs will ask a question similar to the following: “When do I start recording expenses for my business?”, “Do I need to have a business bank account to start recording expenses?” All of these questions are valid concerns for first-time entrepreneurs and I have even personally asked these and many more questions. I also understand the level of frustration that this can cause because come tax time, you want to properly record business expenses to your business’s tax filings.
Scenario A: You have an idea for a business, and you want to buy a domain, logo, etc but you don’t have a business checking account set up yet. Here’s what I did;
Make purchases to your personal accounts while you get your business going and keep ALL of your receipts. You will need these later. Once some time has passed and you now have your business running (read: substantial and consistent revenue being generated), collect all of your receipts and generate an expense report. Submit this expense report to your business as you would to a previous employer. These expenses would be classified in line with your chart of accounts (COA) and offset the entry to Accounts Payable as a payable to yourself for expenses incurred. Your business will then pay you back for expenses incurred.
*It’s important to note*
This payment back to you is not considered part of a disbursement and would not be classified as income and you would not pay income taxes on this payment to you from the business. The awesome folks at Justworks offer an excellent and expanded explanation on this topic here
Scenario B: Same scenario as above but you have not incurred any expenses and you decided to open your bank account immediately. Here, you would charge your business account for all business-related expenses and then record the transactions again in accordance with your Chart of Accounts and then offset the entry with Cash (assuming that’s what you used to pay for your expenses)
It is also important to note that you record expenses in your business in the tax year that you incurred them. This keeps your record keeping and books clean come tax time. Also, you will not have to backdate entries and make adjustments later which can be a real headache.