Are You Classifying Your Costs Correctly?

Are You Classifying Your Costs Correctly?

Are You Classifying Your Costs Correctly?

You all must be aware of costs, it's meaning, and their classification. In the business field, while recording the transactions, we arrange our expenses according to the nature for which they have been incurred. We search for the reason behind their occurrence.

Cost is something of monetary value. It is simply, a sacrifice of something to gain or acquire something. In accounting, the costs incurred are all our expenses. And expenses are the ones from which cash flows, out of the business enterprise.

Small business enterprises, which are engaged in outsourcing accounting services, have to take major concerns regarding the classification of the accurate cost. Outsourcing firms doing accounting and bookkeeping services, also have to get their end results in the form of financial statements.

In these circumstances, it is always preferable to do accounting and bookkeeping tasks along with financial statements, in accordance with GAAP (Generally Accepted Accounting Principles). These principles help the accountant to complete the accounting process, according to accounting standards which will be universally applicable. This will make the comparison easy. Outsourcing accounting and bookkeeping firms always prefer to do the functional classification of costs, in accordance with the guidelines given by the offshore outsourcing companies.


In any corporate, accounting is done on the basis of one basic rule of Accounting:
                             “For Every Debit, There Is Always a Credit”

We record every day to day transaction in the books of accounts on this basic rule and while recording the expenses, we classify these expenses on the basis of their nature and reason.

In US accounting, while recording the expenses we considered the following two points:

  1. We take Vendor name as Payee
  2. Expenses are classified according to the type of vendor’s business, with stated to Firm’s nature of business.

And this is the main base for overseas outsourced companies who delegate their accounting and bookkeeping services to small outsourcing business in Asian countries.

These kinds of classification are called functional classification of expenses.  For instance:

  1. Expenses of restaurants are classified under – Meals and Entertainment
  2. Expenses of the telephone are classified under – Telephone Expenses / Utilities
  3. Expenses of costs on travel are classified under – Travel Expenses

These classifications are done accordingly to the outsourced company’s norms and rules for accounting. It varied from business to business.

Why there is a Need for Accurate Costs Classification?

The classification must be done correctly in the accounting outsource data otherwise there will be chances of errors in the accounting and the output will not be accurate.

  1. For the proper listing of expenses in the Profit & Loss Account.
  2. Degree of accuracy in the Financial Statements.
  3. Proper management of Funds.
  4. We come to know about our vendors appropriately.
  5. Collective storage of data.
  6. Easy to review and follow.
  7. Collective Information of all expenses can be taken.


Firm try their best in preparing the financial accounts with full accuracy. The firm always prefers to avoid making silly to big mistakes in the outsourcing accounting process although, mistakes arise. There may be several circumstances for this chance of error. The reasons can be as follows:

  1. You must have enormous outsourcing business assignments. Due to which classification cannot be done properly. As every outsource business have their own unique policies for classification.
  2. The accounting department of the firm may lack up-to-date knowledge of daily changes make in the accounting norms.
  3. Does not tally the previous transactions and their accounts heads.
  4. Ignoring the special instruction given by the corporate.
  5. The nature and types of expense are not understandable by the employee
  6. It may also be due to the lack of attentiveness of the person by whom the work is done.


For ensuring the high degree of correctness in the classification of the expenses, one takes the following consideration in mind:

  1. Do the timely review of previous transactions carefully, before entering new transactions
  2. Timely training of the accounting staff, giving them awareness about the changes in the accounting norms.
  3. Try your best to classify the expenses by understanding their nature and type.
  4. You must be aware of the industry’s nature, types, policies and standards of business.
  5. Keep in mind, any special instruction given the company’s management in the recording of expenses.

We at Accounting Outsource Hub understand the need to recording your every transaction under their appropriate head. The wrong classification of the expenses can affect the income statement and as well as your balance sheet (for some extent).

So, we ensure that the recording of transactions must be done carefully so that the end results in the form of financial reports must be accurate, true and fair. They will reflect the clear image for the expenses incurred by your company. With the 8 years of experience, we will always provide you with the full accurate data and will never give the chance of any complaint regarding us.

Give us a chance, and we will never let you put you down!

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