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 expense refers to the cost that the company spends for 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 buys a freight for their organization – these expenses are known as direct expenses.
Direct expenses can be deductible according to the IRS. However, it must be proven that these expenses are generating revenue for the company. Another term for this is a direct cost.
Indirect Expense
Indirect expenses are all other expenses that are 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 business operations of the company. However, they are as important as direct expenses to run an organization.
Indirect expenses can vary for different companies. These expenses 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 keep track of your finances. Most large organizations have an accounts department that performs the bookkeeping for the company. The department keeps track of all of the money spent on the company’s expenditure, including the 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 that needs to be taken care of every month. 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 be every month but could appear during the year. These include your home/office repairs, travel expenses, furniture, education, or family vacations. It is essential to carefully look at your bank records and plan to see any of these expenses coming up. Be prepared, as it will help you plan better 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 up a savings account and put in money every month.
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