Where an Expense Belongs
I talked with my accountant friend George Rohan about something small that changes how a company is understood: where an expense belongs. Move a cost into or out of COGS and gross margin shifts, even if net profit doesn't — and gross margin is how people judge a business. Two invoices can both say 'software subscription'; what matters is whether the tool delivers client work or runs the office. For SnapLedger, that means classifying expenses by business function, not just the supplier.
Yesterday, I spoke with my accountant friend, George Rohan, about how business expenses should be classified.
I will write more about George and his story another time. In this conversation, he raised a point that sounds small but has an important effect on how a company is understood.
Not every expense is the same
Not every expense should be treated in the same way.
Some expenses belong in Cost of Goods Sold, or Cost of Services. Others belong in sales, administrative, or other operating expenses.
Why gross margin moves
The distinction matters because revenue minus COGS gives us gross profit. Moving a cost into or out of COGS changes gross margin, even when the final net profit remains the same.
Gross margin is often used to understand the quality, scalability, and economics of a business. It can also influence how a company is valued.
An example from consulting
George gave me an example from consulting and professional services.
A consulting company may pay for research databases, design tools, industry platforms, or other software subscriptions. If those tools are directly used to deliver work to customers, they may belong in Cost of Services.
The accounting software used by the finance team, however, would normally be an administrative expense.
Both invoices may say "software subscription".
The difference is not what the expense is called, but how it is used.
Salaries follow the same logic
The same applies to salaries. A consultant working directly on client projects may be part of Cost of Services. A salesperson is usually a selling expense. A finance manager is normally an administrative expense.
This also means companies should not move costs between categories simply to improve gross margin. Similar expenses should be treated consistently, based on the real operating model of the business.
What this means for SnapLedger
For SnapLedger, this means expense classification cannot rely only on the supplier name or the chart of accounts. The system also needs to understand the business function behind the expense:
Was it used to produce a product, deliver a service, acquire a customer, or run the company?
The answer affects not only accounting compliance, but also how clearly the financial statements explain the business.
Two invoices can say the same thing — 'software subscription' — and belong in completely different places. What matters isn't what an expense is called, but how it is used: to make a product, deliver a service, win a customer, or run the company.
Look at your last few software subscriptions — how many help you deliver work to clients, and how many just run the office? Are they classified that way?
Good bookkeeping isn't only about compliance. Where a cost lands decides whether your financial statements truly explain your business — or quietly misrepresent it.
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