Businesses have expenses, and lots of them. How these expenses are handled form an accounting point of view depends on how they are categorized. If we lump them all together in one big pile, we cannot get a clear picture of what is going on with a company, and we cannot use them as deductions come tax time if we do not know what to call them. (Disclaimer – Do not use this blog for tax advice. Get a certified tax professional to advise you on your taxes.)

So we like to separate into a couple of broad categories for money that is spent. These are sometimes referred to as CAPEX and OPEX and simply refer to Capital expenditures or Operating Expenses. Capital expenditures buy a great big asset that is then depreciated or amortized over a number of years. Operating expenses keep the business running from one day to the next. These are things like utilities, office supplies and salaries. Often we refer to these as overhead.

COGS refer to cost of goods sold. If you are making cakes, then your COGS would be the cost of the ingredients used in that cake as well as the boxes that you are selling them in. You need to separate this out from your other expenses so that you can see how much money you will have left over for other expenses after the product is made. This money is called your gross margin.

For business planning purposes as well as accounting and tax purposes, it is very important to keep your expenses well categorized as they happen. Keep track of which items are COGS, which are OPEX and which are CAPEX, and you will find it much easier to see where your money is going and where you need to tighten your spending.

Have you got a tricky expense that you are having trouble categorizing? What is it, and how have you handled it to date?