I'm not going to get super in-depth about this topic because it can be a very dense one--there's so many ways to track expenses and so many reasons!
Instead, I'm just going to give a quick overview of a few things I do to make my life easier when I need to refer to expenses I've incurred for my business.
Scanning and storing receipts/invoices
The most important part of tracking my expenses is digitizing and storing my documentation. Remember, it's always a good idea to be able to prove what your transactions were for.
If I make a purchase online, I simply download a PDF copy of my invoice or receipt. If the PDF is not available for download, I simply print to PDF. You can do this by starting to print the page your invoice is on and selecting whatever option you have for saving it as PDF document instead. For me this comes up as "Save as PDF" but it can also be listed as a printer called PDF Writer or something along those lines.
If I make a purchase in-store and get a receipt, I scan it using my Brother DS-940-DW. I really like this scanner because it allows me to scan long receipts, which I couldn't easily do in a scanner with a scanning bed. If you get a scanner like this, make sure you can adjust the feeding guides or your receipts might not scan properly.
Digital folders by date
I like to have folders ready to go organized by date. When I have a question about a transaction, the date is always the first thing that narrows down where I should look for it, so I have folders divided by year and further subdivided by month, but you can also divide by quarter.
The last thing I want to mention is consistent naming conventions. When storing your documents, you want to be consistent to make things easier in the future when you're looking for something. There's no set way to name your documents but I like to make sure they will have the information that I specifically look for. For me this is the name of the business issuing the receipt or invoice and the date of transaction organized year-month-day. I do this order because it groups transactions that occurred at the same place and around the same time together, making things easier to find later on.
If you use QuickBooks or similar software for tracking expenses, this makes it easy to add your receipts and invoices to specific transactions.
This might take a little work up front, but remember, you want to make things easier for your future self. Why would you make your future self stress out trying to hunt down a receipt from two months ago? They don't deserve that.
It's necessary to track what you're spending on your business, not only for tax purposes, but so you can keep track of what it is costing you to operate your business and know if you're actually losing money despite earning revenue.
You can also prove what certain assets cost you and when you acquired them, which is important for depreciation.
In the future, I'll also show how I track all the materials I've purchased for use in my business, including what they cost, so I can calculate the minimum price I need to charge for my handmade products.