Key takeaways
What this article covers, in order:
- Why "Amazon" is not a category
- The four questions to ask for every transaction
- A starter category list for US small businesses
- Judgment calls that come up every month
- How detailed should your categories be?
- Consistency matters more than perfection
To categorize a business transaction, ask what the money was for (not who it went to), pick the one category that answers that, and use the same category every time the same thing happens. A short, consistent list of 15 to 25 categories beats a long, clever one. Below is a starter list you can copy, plus the judgment calls that trip people up.
Why "Amazon" is not a category
Jess runs a small candle business out of her garage in Asheville. Her first P&L had a line called "Amazon" with $6,140 in it. Wax, wicks, a label printer, shipping boxes, a phone case, and three months of a streaming subscription were all in there together.
The number was accurate. It was also useless. She couldn't tell whether her cost per candle had gone up, or how much she'd spent on equipment that would last years.
That's the core rule of categorizing: categorize by purpose, not by payee. The vendor is already in the description. The category's job is to tell you what kind of spending it was.
The four questions to ask for every transaction
Run each line through these, in order. It gets fast after the first week.
- Is this business at all? If it's personal, it isn't an expense. It's an owner draw (or a reimbursement owed back to the business).
- Is it moving money between my own accounts? Paying the business credit card from checking, or moving cash to savings, is a transfer. Not income, not an expense.
- Is it income, an expense, or something on the balance sheet? Buying a $2,400 laptop might be equipment (an asset) rather than a one-month expense, depending on your accounting policy and what your CPA advises. A loan payment is partly principal (reduces a liability) and partly interest (an expense).
- Which category describes the purpose? Now pick from your list.
Most categorization mistakes are really mistakes at step 2 or 3. People get "office supplies vs software" right. They get "transfer vs income" wrong, and that inflates revenue.
A starter category list for US small businesses
Treat this as a starting point, not a rulebook. Rename things to match how you talk about your business, and drop what you'll never use.
Income
| Category | Use it for | Example |
|---|---|---|
| Sales / Service revenue | Money customers pay for your work or products | $1,800 client payment for a website build |
| Shipping income | Shipping you charge customers separately | $9.95 shipping on an online order |
| Refunds given (contra income) | Money returned to customers | $45 refund for a damaged item |
| Interest income | Interest from a business savings account | $3.12 monthly interest |
| Other income | Rare, one-off items | Selling an old company trailer |
Cost of goods sold (if you sell products or job-based work)
| Category | Use it for | Example |
|---|---|---|
| Materials / Inventory purchases | What goes into the product you sell | Wax, wicks, jars |
| Subcontractors (job costs) | People you hire to do part of a customer job | Electrician on a remodel |
| Packaging | Boxes, mailers, labels tied to sales | 200 shipping boxes |
| Merchant / payment fees | Card processing and payment platform fees | $2.91 fee on a $100 sale |
Operating expenses
| Category | Use it for | Example |
|---|---|---|
| Advertising and marketing | Ads, flyers, sponsorships | $150 local ad |
| Bank fees | Monthly account fees, wire fees | $15 maintenance fee |
| Contractors (non-job) | Bookkeeper, designer, VA | $400 monthly bookkeeping |
| Insurance | Business liability, equipment insurance | $112 monthly premium |
| Interest expense | Interest on loans and credit cards | $38 card interest |
| Meals | Business meals with clients or staff | $64 lunch with a client |
| Office supplies | Paper, pens, small items | $27 printer ink |
| Professional fees | CPA, attorney | $650 legal review |
| Rent | Office, shop, storage unit | $1,200 monthly rent |
| Repairs and maintenance | Fixing things you already own | $180 van brake repair |
| Software and subscriptions | SaaS tools, apps | $29 design tool |
| Phone and internet | Business lines and service | $85 monthly internet |
| Travel | Flights, hotels, rideshares for business trips | $312 flight to a trade show |
| Utilities | Power, water for business premises | $140 electric bill |
| Vehicle expenses | Fuel, parking, tolls | $58 fuel |
| Wages (if you run payroll elsewhere) | Recorded from your payroll provider's reports | Biweekly payroll total |
Balance sheet accounts (not on your P&L)
- Owner contributions and owner draws
- Transfers between business accounts
- Loan principal (the liability)
- Equipment or other fixed assets, if your CPA wants them capitalized
- Sales tax collected, if you collect it, held as a liability until it's paid (your CPA or sales-tax tool handles the filing)
Judgment calls that come up every month
The mixed receipt. A $214 Target run: $180 office supplies, $34 groceries for home. Split it. $180 to Office supplies, $34 to Owner draw. Don't put the whole thing in either one.
Software vs office supplies. If it's a recurring digital service, it's Software and subscriptions. If it's a physical thing you use up, it's Office supplies. Pick a rule and stick to it.
Repairs vs equipment. Fixing the van's brakes is a repair. Buying a new van is equipment. A $1,900 engine rebuild that adds years of life is a gray area. That's a good one to ask your CPA about once, then apply consistently.
Meals vs travel. Dinner on a business trip can go either way. Many people put all food in Meals, so the category means one thing. That's simpler when your CPA reviews it.
Fees netted out of deposits. If a customer pays $500 and you receive $485.20, the sale was $500 and the $14.80 is a fee. Record both, so your revenue isn't understated.
How detailed should your categories be?
Here's a useful test: would a different number in this category change a decision?
If Jess spends $900 a month on wax and $200 on jars, splitting those helps her price candles. If she spends $12 a month on pens and $8 on paper, splitting those helps nobody.
A rough guide:
- [ ] Fewer than 30 income and expense categories in total.
- [ ] No category with only one or two transactions all year (merge it).
- [ ] No "Miscellaneous" bigger than about 2% of your expenses.
- [ ] No category named after a vendor.
- [ ] Every category has a one-line description you could hand to a bookkeeper.
Consistency matters more than perfection
You'll second-guess yourself. "Is Canva marketing or software?" Here's the secret: it matters much less than doing it the same way every month. If Canva is in Software for Jan through Jun 2026 and Marketing for Jul through Dec 2026, your trend lines lie to you.
Keep a short "category notes" document. A few lines like:
- Canva, Adobe, Google Workspace: Software and subscriptions
- Client coffee and lunches: Meals
- Etsy and card-processor fees: Merchant fees
- Anything for the house: Owner draw
A bookkeeper joining later will thank you for that note.
Clean categories make tax time easier
Your CPA will map your categories to whatever they need for filing. What they can't easily fix is a year of everything dumped into "Supplies" or "Amazon." Clear, consistent categories are the most useful thing you can hand them.
How HelloBooks helps
HelloBooks brings in transactions from a live bank feed (connect most US banks and credit cards) or from a CSV statement import, and you categorize each one in a review list.
- On Starter ($14.99/month) and up, AI auto-categorization suggests a category based on the transaction, so you're confirming more than choosing. If AI credits run out, AI categorization pauses and the books keep working as normal.
- Every plan, including Free, includes P&L, Balance Sheet and Cash Flow reports, so you can see right away whether your categories tell a useful story.
- You can invite your bookkeeper or CPA into the same books to review your choices.
See more of what's included on our bookkeeping features page, or read about AI bookkeeping software. Sole owners may find accounting software for sole proprietors a useful starting point.
FAQs
How many expense categories should a small business have?
Most do well with 15 to 25 expense categories. Fewer if you're a solo service business, a few more if you sell products and want to track cost of goods closely.
Should I categorize by vendor or by purpose?
By purpose. The vendor name is already in the transaction description. A category should describe what kind of spending it was, so "Amazon" should never be a category.
What do I do with a transaction I can't identify?
Put it in a temporary holding category (some people call it "Ask my accountant"), add a note, and clear it before you close the month. Don't leave it there for a year.
Is a credit card payment an expense?
No. The expenses were recorded when you made the purchases on the card. Paying the card from checking is a transfer that reduces what you owe.
Can I change categories later?
Yes, but be careful after you've closed a period or shared reports with your CPA. Recategorizing old months changes past numbers. Make the change, then note what you changed and why.
Get the list right once, write down your rules, and categorizing becomes a five-minute habit instead of a monthly headache.
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