How to categorize business expenses (with common categories)
Every dollar your business spends should land in a category, such as rent, software, fuel, or supplies. Categories turn a long list of transactions into a report you can actually read: where the money went, what's growing, and what you might cut. They also make tax time much smoother, because your accountant can see your spending grouped in a sensible way.
Here's how to set up categories that work, plus a starter list.
Keep it simple
The most common mistake is creating too many categories. If you have “Office supplies,” “Printer stuff,” “Paper,” and “Staples run,” you'll spend your time deciding between them and your reports will be harder to read. Aim for roughly 15–25 expense categories. You can always add more detail later with notes or sub-accounts.
A good test: would you make a different decision if you saw this number on its own? If yes, it deserves its own category. If not, fold it into a broader one.
A starter list of common expense categories
Most small service businesses can start here and adjust:
- Advertising and marketing: ads, website, printed materials, sponsorships.
- Bank and payment fees: monthly account fees, card processing fees.
- Contractors: payments to independent contractors (track these carefully for year-end forms).
- Equipment (small): tools and devices under whatever threshold your accountant sets.
- Insurance: general liability, professional liability, commercial auto.
- Meals: business meals with clients or while traveling. Tax rules here have limits, so keep notes on who and why.
- Office supplies: paper, ink, small items you use up.
- Professional fees: accountant, attorney, consultants.
- Rent or lease: office, studio, shop, storage.
- Repairs and maintenance: fixing equipment or your workspace.
- Software and subscriptions: the apps you pay for monthly or yearly.
- Supplies and materials: things used to deliver your work (job materials, client consumables).
- Phone and internet.
- Training and education: courses, certifications, books.
- Travel: flights, hotels, and transportation for business trips.
- Vehicle: fuel, maintenance, parking, tolls (or mileage, depending on the method your accountant uses).
- Utilities: electricity, water, gas for a business space.
- Licenses and permits: business licenses, trade licenses, renewals.
- Payroll and payroll taxes (if you have employees).
The tricky ones
Things that aren't expenses at all
Some money leaving your account isn't an expense:
- Transfers between your own accounts (checking to savings, or paying your business credit card). The money just moved.
- Loan principal payments. The interest part is usually an expense; the principal reduces what you owe.
- Owner draws. Money you pay yourself as an owner is generally recorded as a draw from equity, not an expense.
Getting these right is one of the biggest improvements you can make to your books, because otherwise your expenses look inflated.
Big purchases
A new laptop or a vehicle may need to be recorded as an asset rather than a one-time expense. Ask your accountant what threshold they'd like you to use.
Mixed personal and business
If a charge is partly personal (say, a phone plan you also use personally), ask your accountant how they'd like it split. Better yet, keep business spending on business accounts so this rarely comes up.
Build a weekly habit
Categorizing is easiest when the transaction is fresh in your memory. Set aside ten minutes a week to review new transactions. Anything you can't place right away, mark for follow-up instead of guessing.
Let software do the first pass
Most of your transactions repeat: the same software subscription, the same gas station, the same supplier. Modern bookkeeping tools can learn those patterns and suggest the category, leaving you to review rather than type.
How Apsis helps
Apsis connects to your bank and uses AI to suggest a category for each transaction, explaining in plain words what each line was. You review and correct anything that's off, and every correction teaches it your preferences for next time. Transfers between your own accounts are recognized as transfers, not expenses. Try it free for 30 days.