An expense is the cost incurred or the amount spent in an organization through its operations to generate revenue. Expenses are the amount of money paid to purchase goods or services by an organization. An expense can be categorized into two major classifications: direct expense and indirect expense.
Direct Expense
Direct expenses refer to the cost that the company spends on its core operations. These expenses are related to the purchase of goods for the company. For example, a freelance writer may buy utensils for their writing purpose, or an executive may buy freight for their organization—these expenses are known as direct expenses.
According to the IRS, direct expenses can be deductible. However, it must be proven that these expenses generate revenue for the company. Another term for this is direct cost.
Indirect Expense
Indirect expenses are all other expenses required to run an organization. Bills, rent, insurance, office supplies, and legal charges are all considered indirect expenses. An indirect expense is not related to the company’s business operations. However, it is as important as direct expenses.
Indirect expenses can vary between companies. They appear on the debit side of the IRS, which means they are non-deductible. Personal and indirect expenses are not considered IRS deductible.
Tracking your Expenses
How do I maintain a monthly budget? I am not able to save anything by the end of the month. What should I do? I have to pay my tuition, how do I manage? These questions run in everyone’s mind, whether running a household or an organization.
Many people ask why it is essential to keep track of one’s expenses. The answer is simple: if you want to maintain your finances, you need to keep track of every single penny. Keeping track of your expenses will help you maintain a monthly budget and your long-term goals.
There are many ways to manage your finances. Most large organizations have an accounts department that performs bookkeeping for the company. The department keeps track of all of the money spent on the company’s expenditures, including direct and indirect expenses.
Steps to Track Your Expenses
- Monthly bills: List your monthly bills, such as utility, phone, cable, credit/debit card, loans, insurance, salaries, and everything else that needs to be paid. Use a spreadsheet or a notebook to write down these bills.
- Personal funds: Groceries, clothes, gas, entertainment, and personal items fall into this category. These expenses are as necessary as any other expense. Please keep track of these expenses and write them down. Keep your receipts handy or staple them into your notebook. Cash and credit/debit card payments should both be included. These are all considered indirect expenses.
- Review: When you have everything listed, add up the numbers. Once you see your monthly expenditures, think of strategies that will help you save money. For example, try using ATMs that do not charge any additional fees. Cut down on the extra channels that you no longer watch; it will cut down the cost of your cable bill. It’s relatively easy to get creative here; you’ll have the extra money in your bank account with little effort.
- Big expenses: These expenses may not appear every month but could appear throughout the year. They include home/office repairs, travel expenses, furniture, education, or family vacations. It is essential to carefully look at your bank records and plan for any of these expenses. Being prepared will help you better plan for an emergency.
- Plan a strategy: After reviewing all of your expenses, think of a way to cut off anything extra that you do not require. Plan for your goals. Set up a target every month to save up a certain amount. If possible, open a savings account and put money in every month.
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