What does it mean to categorize transactions? It means that you tell QuickBooks, or any other accounting software, what type of income or expense a particular bank transaction was for. I see a lot of clients with bank feeds set up in QuickBooks so all of their bank transactions are being downloaded but everything is going to a misc. or uncategorized expense. This does not give you useful information. There is no way to tell how you’re spending your money.
When you categorize expenses, you’re telling your accounting system specifically what you spent your money on or where your money came from. The categories you choose from are really all of the accounts on your chart of accounts. The more transactions you categorize, the more detailed information you’ll have in your accounting system to help you make decisions. Instead of knowing you spent $10,000 last month, it would be better to know that you spent $3000 on advertising, $5000 on rent, and $2000 on office supplies.
All transactions should be categorized in order to give you the best idea of how your business is performing. Knowing where you spend your money will help you spot where you might be overspending and help you make better decisions to grow your business.