When Expense Coding Goes Wrong
A software subscription is coded to "Office Supplies." A contractor payment is coded to "Employee Wages." A meal with a client is coded to "Travel" instead of "Entertainment." Individually, each error is small. Cumulatively, they make your financial reports misleading.
If your COGS reports include expenses that belong in overhead, your gross margin is understated. If marketing spend is coded to "Other Expenses," you can't measure marketing ROI. If capital expenditures are coded to operating expenses, you're affecting both your P&L and your tax treatment.
The Most Common Coding Errors
Splitting COGS from operating expenses: Direct costs (materials, direct labor, contractor work tied to revenue) belong in COGS. Overhead (office supplies, software subscriptions, administrative wages) belongs in operating expenses. The line can be subtle, but it matters for gross margin reporting.
Sohovi gives you the data quality picture you need to make the case for fixing it — and to track improvement over time.
Lumping expenses in "Miscellaneous": If "Miscellaneous Expense" is getting coded regularly, your chart of accounts has a gap. Find the gap and create the right account.
Personnel vs. contractor: Payroll processing is different from a contractor payment. Misclassifying either has tax implications, not just reporting ones.
Capital vs. expense: Equipment purchases over your capitalization threshold (often $2,500 or $5,000) should be capitalized as assets and depreciated, not expensed immediately. Expensing a capital item understates assets and overstates current-period expenses.
Sohovi tracks quality trends across runs and alerts you when a metric — null rate, duplicate count, score — moves outside its normal range.
Intercompany vs. external: For businesses with multiple entities, transactions between entities need special treatment. Coding intercompany transactions as regular expenses overstates expenses and creates consolidation problems.
The Expense Audit Process
Monthly:
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Pull a report of all transactions coded to "Miscellaneous" or "Other." Review each one. Find the right account.
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For expense accounts with more than 10% variance from prior month, review line items. Was there a legitimate business reason, or did something get miscoded?
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Spot-check 20 expense entries chosen randomly. Are they coded correctly? Ask yourself: "If I searched for all transactions in this account, would this entry be something I expect to find there?"
Building Coding Habits
- Account descriptions: Write a one-sentence description of what belongs in each expense account. Print it. Put it near whoever codes expenses.
- Requiring approval for new accounts: No one creates a new account without approval. This prevents the proliferation of accounts that are created to avoid figuring out the right existing account.
- Regular training: Spend 30 minutes quarterly reviewing common coding questions with anyone who enters expenses.
