Chart of Accounts & Categorization
How to Categorize Business Expenses (Without Overthinking It)
Short answer
Ask three questions for every transaction: (1) Was it tied to a specific job? → COGS. (2) Is it a recurring overhead cost? → Operating Expense. (3) Will it last more than a year and cost over $2,500? → Asset (depreciate). Everything else gets 'Office Supplies' or 'Miscellaneous' — and you move on.
Bookkeeping perfectionism kills more small-business owners than under-categorization does. Speed matters more than precision on the third decimal place.
The 3-question decision tree
- Was this expense for a specific job or product I sold? If yes → Materials, Subcontractor, or Job Supplies (COGS).
- Is this a normal monthly overhead cost? If yes → Vehicle, Software, Phone, Insurance, etc. (Operating Expense).
- Did it cost over ~$2,500 and will last more than a year? If yes → Equipment or Vehicle (Asset, depreciate over time). Otherwise expense it now.
Common borderline cases
| Expense | Where it goes |
|---|---|
| Gas for the work truck | Vehicle Expense (or actual mileage) |
| A new $1,800 power tool | Tools & Equipment (expense, under $2,500) |
| A new $8,000 trailer | Asset (depreciate via Section 179 election) |
| Lunch with a customer | Meals (50% deductible) |
| Annual software subscription | Software (12-month rule, expense now) |
| Sales tax remitted to the state | Sales Tax Payable (NOT an expense) |
Frequently asked questions
What if I'm not sure?
Use 'Ask My Accountant' as a temporary category. Review it monthly. Don't let unknowns stall the whole month's close.
Bookkeeping, done for you.
Glo Invoice keeps your P&L, AR, and expenses in sync automatically — no spreadsheets, no surprises.
Sources & further reading
Primary sources we consulted when writing and reviewing this guide.