Bookkeeping Basics: Understanding Expenses

We’re continuing our Bookkeeping Basics series, and today we’re talking about something every business owner understands on a very real level: expenses.

Simply put, expenses are the cost of running your business. Every business has them, but not all expenses are created equal. Understanding how expenses are categorized helps you price your services properly, read your financial reports accurately, and make better decisions about your business.

What Are Expenses?

Expenses are the costs required to operate your business. Depending on the type of business you have, expenses usually fall into two main categories:

1. Cost of Goods Sold (COGS)
2. Operating Expenses

Cost of Goods Sold (COGS)

Cost of Goods Sold are expenses that are directly required to generate revenue.

Using construction as an example:

• Lumber, drywall, screws, and materials
• Subcontractors like plumbers or electricians
• Freight or delivery costs to get products to customers

If you don’t incur the cost, you can’t earn the revenue, it’s likely COGS.

COGS is important because it directly impacts your gross profit, which we’ll explore more when we talk about the income statement and balance sheet.

Operating Expenses

Operating expenses are the costs required to run your business, even if they don’t directly generate revenue.

These are the expenses that allow you to open your doors, stay compliant, and function day-to-day. While they don’t produce income on their own, your pricing must cover these costs if you want to stay in business.

Some common operating expenses include:

• Advertising and promotion
• Accounting and legal fees
• Professional fees
• Bank fees and interest charges
• Subscriptions, memberships, and dues (watch these — they add up fast!)
• Insurance
• Office expenses
• Meals and entertainment
• Rent
• Repairs and maintenance
• Utilities
• Phone and internet
• Travel
• Wages

This isn’t an exhaustive list — expenses vary widely by industry — but these are the most common ones you’ll see.

A Few Helpful Notes

• Expense accounts are usually numbered 5 and up in your Chart of Accounts.
• Depreciation is an expense related to your assets, and your accountant typically handles these entries annually. You don’t need to manage this day-to-day.
• While expenses feel obvious, tracking them correctly is essential for pricing, cash flow, and profitability.

Most people “get” expenses because we all feel them. But when you understand how they’re categorized and why they matter, you gain a lot more control over your finances.

If you have questions or want a specific expense explained, let me know — I’m always happy to help.