What Is an Expense Account? Definition, Types & Tips
When it comes to businesses, the goal is to make money. However, to make money you have to spend money, or so the old saying goes. As such, business owners need to be aware of their business expenses. The best way to do that is through organizing your accounting books.
If you’re looking to get more organized with your books, it’s time to start getting involved with your expense accounts. These are accounts that record all of your business’s expenses. Keep reading to find out more.
Here’s What We’ll Cover:
What Is an Expense?
Before we can get into expense accounts, understanding what an expense is needed to come first. Business expenses are any money spent for work-related purposes. They occur during regular business operations. A list of expenses you can expect to incur is below:
- Employee wages and benefits
- Any advertising expense
- Inventory and equipment expenses
- Rent payments
- Utility payments
- Business travel reimbursement
All of these expenses can be categorized even further. Categorizing expenses properly is important in keeping your books in order.
Understanding business expense categories helps you with your expense accounts. Each set of categories lends itself to normal expenses. These are the costs you can expect to see in each category.
- Operating and Non-Operating Expenses: These are expenses that relate to business operations. Operating expenses are any costs that relate to a business’s main activities. This includes the cost of goods sold (COGS), for example. Non-operating expenses are things like business loan interest, or administrative expenses.
- Deductible and Non-Deductible Expenses: When it comes to tax time, all deductions are important. Deductible expenses can be used to reduce tax liability, while non-deductible expenses can’t.
- Fixed and Variable Expenses: Fixed expenses always cost the same, while variable expenses can change. Fixed expenses are things like rent. Meanwhile, variable expenses are things like materials and direct labor. They depend on the amount of business being done.
Now that the basics of expenses have been covered, we can start to cover expense accounts and why they’re important.
What is an Expense Account?
Expense accounts are used during the accounting process. They help you track and sort expenses that your business has during an accounting period. In accounting terms, expense accounts are increased by using debits. They are decreased by using credits.
When you spend money, your expense account increases. Expense accounts are considered temporary accounts in the accounting world. This means that they reset when a new accounting period starts.
Expense Accounts Are Split
An expense account is a single entity in the books. However, this doesn’t mean that it can’t be broken down further. In fact, breaking your expense account down into smaller accounts is suggested. These accounts are called sub-accounts. The best accounting software options allow you to do this.
The reason behind splitting expense accounts up into smaller accounts is for tracking purposes. This organizational method to reviewing expense accounts is invaluable. A different sub-account can be created for each type of expense your business incurs. This allows you to have full oversight over the way your business is spending money.
An expense account needs to have a total balance, as well as the balance for each sub-account. This lets you view your expenses at a glance, making it easy to track costs.
What Are the Benefits of Having an Expense Account?
There are several reasons that you should have an expense account. First of all, accounting books are required to keep an expense account to remain legal. All business expenses must be recorded according to accounting principles. As such, you absolutely have to have an expense account.
The biggest advantage, besides maintaining legality, is organization. Organization is one of the most important skills for any business owner. While you can have a generalized expense account, most people choose to break their accounts down. This improves organization greatly. It also allows for more budgeting.
When you track your expenses, you can plan on how to spend your money. You’ll be able to predict future expenses. For example, if you know you have an annual expense at the same time every year, you can plan for that. The only way you can do that, though, is by keeping track of your specific expenses.
Some Common Expense Accounts
Some of the most common expense accounts are listed below. These are sub-accounts that you can expect to see in nearly every business’s expense account.
- Cost of sales
- Advertising expense
- Salaries and wages
- Supplies expense
- Employee expense
- Interest expense
Each one of these is commonly encountered in business. As such, they are documented thoroughly by most companies. Keeping oversight on these can help businesses be more successful.
Expense Accounting Tips
If you’re new to accounting, there are some expense accounting tips that you may benefit from. These benefit both small business owners, as well as employees of any business. If you have employee expense accounts, consider providing these tips to your employees. If you’re a business owner, be sure to follow them yourself, as well.
Tip 1: It Isn’t Your Money
This tip is arguably the most important. When you have an account set up for expenses, it’s important not to charge things to it unnecessarily. Even if you own the business that the allocated money is budgeted for, treat it separately. This can help you avoid any purchases that you may regret making later on.
Tip 2: Being Frugal and Being Cheap Are Different
Expense accounts are often looked at under a magnifying glass by business owners. They scour them for any costs that they may be able to cut. However, you need to remember that some expenses are absolutely necessary. As such, you don’t want to cut expenses for the sake of saving money. Changing suppliers may harm you in the long run, even if the product you receive saves you money. If it’s low quality, it will be noticeable.
Tip 3: Maintain Integrity
Expense accounts are the best way to track your finances. As such, when you’re categorizing expenses into sub-accounts, you have to be honest about it. If you start categorizing expenses incorrectly, you may face the consequences later. This can become a problem when categorizing your deductible and non-deductible expenses. When these are miscategorized, it can spell trouble for all of your financial records and proceedings.
Accounting is necessary for any business. Keeping track of all of your monetary information is a must. It can help business owners make informed decisions, and can lead to better budgeting overall. One of the most reviewed accounts in accounting is the expense account. Expenses are any money spent by a business, so naturally they’re very important to keep track of. Expense accounts tell you exactly where your money is going. Being accurate and organized with them is crucial.
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