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There are a few words that an accounting professional like myself really, really doesn't like and two of those words are in the title of this post....MISCELLANEOUS and UNCATEGORIZED. Just typing those words make my stomach turn. Allow me to explain why.
Accounting, like many industries, has its own language. Some are words may not be used in everyday language, like assets, and some are words that take on a new meaning in accounting, like the word balance.
The words miscellaneous and uncategorized are not bad works in everyday language. However, in accounting terms, they mean that a transaction does not have a home in the Chart of Accounts. Except for rare occasions, every single transaction in your accounting records needs to be categorized correctly in your Chart of Accounts.
What is a transaction you ask? A transaction is a completed agreement between a buyer and a seller to exchange goods, services, or financial assets in return for money. (In other words, a business sold something or purchased something.)
Often, a person who is not familiar with GAAP (Generally Accepted Accounting Principles) or accounting best practices, will put transactions they are not sure about into the Miscellaneous or Uncategorized Expense/Uncategorized Income. This is incorrect.
If you have a transaction and you are not sure where it goes, the best idea is to ask your bookkeeper or CPA where to categorize that transaction. If you don't have an accounting professional like a CPA or bookkeeper working with you, look through your Chart of Accounts in your accounting/bookkeeping program and see if there is a logical place to categorize the transaction.
I will try to give some examples of transactions that are pretty common. Remember, accounts can be labeled different ways. Example: Repairs & Maintenance: Auto OR Auto: Repairs & Maintenance. Both are the same type of account, just labeled differently.
Examples of Expense Transactions and Categorizations -
Internet Fees - Utilities
Networking Fees - Advertising or Networking or Dues
Professional Dues - Professional Fees or Dues/Subscriptions or Professional Memberships
Quickbooks Monthly Fees - Office Supplies or Computer Software or Subscriptions
Website Hosting - Office Supplies or Advertising or Subscriptions
Gas for your car - Auto Expenses or Auto Expenses: Gas or Auto Maintenance: Gas or Travel
As you can see from the examples above, some expense transactions or obviously in a specific category and some can be put in a few different categories, however, none of them are Miscellaneous/Uncategorized Expense. My best advice is to be consistent where you categorize a particular transaction. This will help you find transactions and keep your accounting records clean. (Another reason to not use Miscellaneous our Uncategorized accounts, it's messy!)
The same can go for income. Income is usually listed under Sales, Sales of Product, Sales of Service, or Billable Expense Income. If your business has different avenues of sales, your income can be split up if you want detailed tracking of your sales. I will leave that subject for another blog post though.
Now you might be thinking to yourself, Rebecca, sometimes I go into my accounting/bookkeeping program and the program "suggests" Uncategorized Expense or Income. I agree, but even the AI in these programs can be wrong (don't tell the robots I said that....please!) Many current programs use a very simple AI to "help" us business owners put our transactions in the correct categories, or, the program cannot decide where a transactions goes and so it throughs it into the infamous black hole of accounting....where we accounting professional hate these transactions to go.
Honestly, I only use Miscellaneous on rare occasions, like a one up weird transaction that really cannot be put in a good category. I also use it (begrudgingly, I will add) if a CPA of one of my clients asks me to for valid reasons. Usually, those reasons are because the Miscellaneous or Uncategorized account is being used as a temporary holding account which will be cleaned out by a journal entry at the end of a period (quarterly or yearly). This is another accounting term called Zeroing Out.
If you have any further questions about this or other bookkeeping subjects, please contact me at Rebecca@RHBizSolutions.com. I look forward to talking to you about your bookkeeping needs.
Here's To Your Success!
Rebecca Hurt
RH Business Solutions
Disclaimer:
Any accounting, business or tax advice contained in these articles, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. Please seek consultation from the appropriate accounting/tax professional.