How staying on top of categorizing your transactions helps your business

October 21, 2020
5 minutes read

Being an entrepreneur is exciting. Bookkeeping and taxes...not so much.

When running a small business, you learn to roll with the punches and take the good with the bad. But that doesn’t mean it’s fun or easy to stay on top of things like accounting and tax prep.

One way to make it less daunting is to take steps now for when you file taxes in the future. One of those helpful steps is to track your business expenses, start categorizing your transactions, and continue to do so on a weekly basis.

Now let’s dive into categorizing your transactions successfully

It can be intimidating to think about organizing these transactions, especially if you haven’t been able to keep up with them in a while. But not to worry, we’ll take you through exactly how to get set up.

Step 1: Separate business and personal finances

The first step is to separate your business and personal finances. When these funds are combined, it makes accounting, bookkeeping, and organization a lot more difficult–especially in case of an audit. To avoid this, you can open a business bank account and make sure that none of your personal expenses get mixed in with your business expenses. Hint: Come tax time, having a business bank account makes it’s a lot easier to cross reference and keep accurate books.

Don’t just choose any bank though. It’s important to do your research when choosing a bank to work with for your business. While the financial institution that handles your personal banking may be your first thought, it may not be the best choice.

Wave Money makes it easy to manage all your business spending in one place. It includes a business bank account, debit card, and mobile app so you can deposit funds, make purchases, and manage everything on the go.

Step 2: Connect your bank

Once you connect your bank account to Wave and import your transactions, your records should update every 24 hours. However, depending on your bank, it might be a bit longer.

Wave connects to over 15,000 banks across the U.S. and Canada. If your bank won't connect, or won't stay connected, we’ve put together this help centre article on understanding bank connections, and what alternatives are available.

Step 3: Import your transactions

Step 4: Categorize your transactions

Keep your receipts

Though you’ll have a designated business account, it’s still important to retain records and documentation of your transactions. These will come in handy at tax time, as well as if you do face an audit. They’re also helpful if you’re unsure of which category the expense goes under, so an accountant or tax professional can look at the receipt and advise.

Know the different expense categories

Remember, categorizing transactions goes beyond business vs. personal. When it comes to small business expenses, you might use the following categories:

  • Maintenance and repair
  • Entertainment
  • Travel
  • Payroll and salary
  • Health insurance
  • Retirement contributions
  • Employee benefits
  • Equipment
  • Rent or mortgage
  • Utilities
  • Internet
  • Furniture
  • Office supplies
  • Vehicles
  • Accommodation
  • Continuing education
  • Conferences and seminars
  • Professional fees
  • Payment processing
  • Marketing and advertising
  • Business Insurance
  • Software and subscription services
  • Interest

By categorizing these transactions, it will make it so much simpler at tax time when you have the opportunity to claim small business expenses. We’ve listed a few of the top business expense deductions here to give you more ideas.

Categorize and reconcile on a weekly basis

Though you might have processes and systems in place that largely let you run your bookkeeping on autopilot, it’s still important to make checking in a regular practice. We recommend reviewing at your expenses weekly, as this helps maintain accuracy, keeps you informed, and proactively allows you to spot any red flags.

Let’s get into why you should categorize transactions

There are many benefits to categorizing business transactions and expenses. Many small business owners use expenses to reduce taxes, protect their business, and understand cash flow. And doing it on a weekly basis is much more digestible than categorizing hundreds of transactions that have been piling up over weeks or months, which is a major bookkeeping mistake to avoid.

Reduce taxes

Taxes are an often unexpected and unfortunate reality to self-employment. But there are ways to prepare year-round to legally reduce your tax liability, one of which is writing off business-related expenses. In 2015 alone, US-based organizations wrote off more than $1.1 trillion in business expenses.

Here’s how it works: If you spend money for your business, you can deduct that amount from your taxable income. So instead of paying taxes on all of the money you received, you only pay taxes on your profit, the money you actually made. This amount is less than the amount you receive, so it means your tax obligation will also be less.

See where your money is going

More than 80% of small businesses fail because of cash flow challenges. It’s too easy to get caught up in the other parts of your business and let your passion overshadow the bottom line. But it’s important to ensure there’s always more coming in than going out, and categorizing transactions forces you to stay on top of that cash flow.

Reduce your Risk

Audits are a heck of a lot easier to deal with when you have detailed records. Entrepreneur Kristin Knapp relied on her transaction records from Wave to help get through her audit scare. “What I learned was that the more organized you are–especially if you’re storing your records in an online software–the easier the audit process is,” she writes.


All in all, while it may never be fun, categorizing transactions doesn’t have to be painful. By staying on top of it and using Wave, you can keep your records in top shape with minimal hassle.

By Alexandra Sheehan

The information and tips shared on this blog are meant to be used as learning and personal development tools as you launch, run and grow your business. While a good place to start, these articles should not take the place of personalized advice from professionals. As our lawyers would say: “All content on Wave’s blog is intended for informational purposes only. It should not be considered legal or financial advice.” Additionally, Wave is the legal copyright holder of all materials on the blog, and others cannot re-use or publish it without our written consent.

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