Expense account definition
/What are Expenses?
Expenses are costs incurred in order to generate revenue. There are many types of expenses that cover all aspects of an organization’s operations and financial structure, including the cost of goods sold, compensation expense, utilities expense, rent expense, and interest expense.
What is an Expense Account?
Expense accounts store information about different types of expenditures in an organization’s accounting records. The phrase most commonly refers to travel and entertainment expenses, and also applies to a type of account. Both definitions are noted below.
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The T&E Expense Account
An expense account refers to funds paid to an employee, which are then used for travel and entertainment expenditures. Expense account funds may be paid in advance of the time when they are actually expended on company business, in which case the funds are referred to as an advance. Alternatively, the funds may be paid in response to the submission of an expense report by an employee, in which case the funds are referred to as a reimbursement. An advance is initially recorded as a current asset, while a reimbursement is immediately recorded as an expense as incurred. When an employee submits evidence of how an advance was used, the current asset is then recognized as an expense.
The amount of cash payments associated with an expense account tend to be largest when linked to an employee who operates independently of the internal operations of a business, of which the best example is a salesperson. These individuals need sufficient funding to travel more than is customary for other employees.
The concept of the expense account can be abused, either by spending more funds than would be required by a prudent person, or by receiving advances and not using the cash on behalf of the business. Consequently, many businesses impose tight controls over the use of expense accounts, including the use of expense reports, travel policies, audits of payments made, and ongoing reviews of the outstanding balance in the advances asset account.
Characteristics of a T&E Expense Account
The main characteristics of a travel and entertainment expense account are as follows:
Tracking purpose. This account is specifically used to record expenses incurred for travel, lodging, meals, transportation, and client entertainment. Expenses recorded in this account must be directly related to business operations, such as attending conferences, client meetings, or team-building events.
Normal balance. T&E accounts have a debit balance, as expenses increase with debits.
Expense categories. Travel and entertainment expenses are often divided into subcategories for detailed tracking. Some expenses may be charged to the travel expenses account, which includes airfare, car rentals, hotel accommodations, mileage reimbursements, tolls, and parking fees. Other expenses may be charged to the meals and entertainment account, which includes client meals, team dinners, event tickets, or other forms of hospitality.
Documentation requirements. To comply with tax regulations and internal policies, businesses require detailed documentation for T&E expenses.
Audit analysis. T&E expenses are often subject to a higher-than-usual number of audits to ensure compliance with company policies and tax regulations.
The Expense Account Type
The bulk of all accounts used in the general ledger are expense accounts. This is a type of temporary account in which are stored all expenses incurred by an entity during an accounting period. Thus, there may be expense accounts for bank fees, the cost of goods sold, utilities, and so forth. These accounts are considered temporary, for they are zeroed out at the end of the fiscal year, to make room for the recordation of a new set of expenses in the next fiscal year.
Presentation of Expense Accounts
Expense accounts are typically listed in the expenses section of the reporting entity’s income statement. If these expenses are related to the sale of goods or services, then they are listed within the cost of goods sold section of the income statement. Otherwise, they are listed in the general, selling and administrative expenses section of the income statement.