How to Categorize Expenses in QuickBooks Online

Mastering the basics of smart bookkeeping.

If you're a small business owner using QuickBooks Online (QBO), one of the most important things you can do to stay on top of your finances is to categorize your expenses accurately. It might seem like a small task, but it can make a big difference when it comes to budgeting, reporting, and preparing for tax season.

Let’s walk through how and why to do it the right way.

Why Categorizing Expenses Matters

Every dollar you spend in your business affects your bottom line. When you properly categorize expenses in QuickBooks, you gain:

• Accurate financial reports (Profit & Loss, Balance Sheet, etc.)

• Improved cash flow tracking

• Simplified tax filing

• Insight into your spending habits

And best of all—you avoid missing deductions that could save you money.

How to Categorize Expenses in QuickBooks Online

Step 1: Connect Your Bank and Credit Cards

When you connect your business accounts to QBO, transactions will automatically download into your system.

Step 2: Go to the Banking Tab

In the left-hand menu, click Banking (or Transactions → Banking). You’ll see a list of recent transactions.

Step 3: Review and Categorize

Click on each transaction. QBO will often suggest a category based on your history or vendor type. You can:

• Accept the suggested category

• Change it to a more accurate one

• Split it between multiple categories if needed

Common categories include:

• Office Supplies

• Advertising & Marketing

• Professional Services

• Travel

• Meals & Entertainment

• Software Subscriptions

Make sure you're choosing categories from your Chart of Accounts that reflect the true purpose of the expense.

Step 4: Add Rules (Optional but Powerful)

QBO allows you to create bank rules so recurring transactions (like software fees or utility bills) are automatically categorized every month.

Tips for Better Categorization

• Be consistent: Don't switch categories for similar transactions.

• Avoid using “Uncategorized Expense” unless you're unsure and plan to revisit.

• Review your categorized expenses monthly.

• Ask your bookkeeper or CPA which categories are best for your industry.

FAQ

Q: What if I categorize something incorrectly?
A: You can always go back and re-categorize the transaction. Just be sure to do it before tax season.

Q: What categories are tax-deductible?
A: Most business expenses are, including advertising, supplies, travel, and software—but they must be categorized correctly to qualify.

Q: Should I create custom categories?
A: You can, but keep it simple. Too many categories can complicate reports and confuse your CPA.

Q: Do I need to categorize personal expenses?
A: No. You should not run personal expenses through your business account. Keep them separate.

Need Help Cleaning Up Your QuickBooks?

Categorizing expenses might seem simple, but mistakes can cost you in the long run. If your books feel messy or overwhelming, let’s clean them up—together.

📅 Book a free call with Dr. Bryan Raya to get your QBO set up and working for you.

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