Out of 400 survey respondents, 91% said they’d be more efficient if their workspace was organized. If you believe organization influences productivity, shouldn’t you better organize your accounting books?
Organizing your books doesn’t just keep you productive—it also keeps you legal. So when you spend money in business, you must write down your expenses. That’s where your expense account comes in. So, what is an expense account?
Read on to first review what expenses are before diving into the world of expense accounts.
What are expenses?
Expenses are the costs that a business incurs during regular business operations. You incur expenses when your business spends money (e.g., when you purchase a good or service).
A few examples of expenses in accounting include:
- Employee wages and benefits
- Inventory and equipment purchases
- Travel reimbursement
Expenses are inevitable in business. But, there are a number of expense categories you should know about to keep your finances in check and stay legally compliant.
Business expense categories
Before we get into what is an expense account, you need to familiarize yourself with the different types of expenses.
There are a number of expense categories, including:
- Operating vs. non-operating expenses
- Fixed vs. variable costs
- Deductible vs. non-deductible expenses
Operating vs. non-operating expenses: Operating expenses are costs that relate to your business’s main activities, like the cost of goods sold (COGS). On the other hand, non-operating expenses are costs that are not directly tied to operating activities, like business loan interest.
Fixed vs. variable expenses: The expenses you incur while running your business can also be categorized as either fixed or variable. Fixed costs are expenses that are constant, regardless of how much you sell (e.g., rent). Variable expenses are costs that change based on how much you sell (e.g., direct labor). Keep in mind that your operating costs are made up of both fixed and variable costs.
Deductible vs. non-deductible expenses: Some of your business expenses are deductible, meaning you can deduct their costs from your business’s taxable income and reduce your tax liability. This is one reason why tracking your expenses is important. You should also keep in mind that deductible expenses can be fully or partially deductible.
What is an expense account?
An expense account helps you track and sort the various expenses your business has during a time period. Expenses in an expense account are increased by debits and decreased by credits. Your expense account increases when you spend money. Expense accounts are considered temporary accounts, meaning they reset when a new period starts.
Break down your expense account into smaller sub-accounts. That way, you can observe which expenses you spend the most on, better track your money, and stay organized.
Sub-accounts list out how much you spend on each type of expense. You can create sub-accounts for all your expenses, like payroll and advertising.
Your expense account should include balances for each sub-account as well as a total expense balance.
Expense accounts aren’t the only accounts that you need to track. An expense account is one of the five main types of accounts included in a company’s chart of accounts. The other core accounts are:
- Income or revenue
While reading the above list, you may have wondered about the difference between expenses and liabilities. Liabilities are unpaid expenses that you owe to businesses, employees, or other entities.
Why do you need an expense account?
There are a number of reasons why you need to track your expenses in an account in business.
Separating your expenses can help you stay legal. Separating your expense amounts into different categories can help you avoid mixing deductible and non-deductible expenses. If you deduct non-deductible expenses from your taxable income, the IRS may get suspicious.
An expense account is also critical for staying organized and helping you budget. When you separate your business’s expenses, you get a better idea of which expenses are constant and which are intermittent. That way, you can predict future expenses when creating your budget.
It’s easy to spend money on things you don’t need. With an expense account, you can easily compare your outgoing and incoming money. And by separating your expenses into different accounts, you can determine where all of your money is going.
As a recap, an expense account can:
- Keep you legal
- Help you stay organized
- Show you what all your money is going towards
- Help you cut out unnecessary expenses
- Be useful for comparing expenses to revenue
- Help you budget for future expenses
And, last but not least, creating an expense account is all part of managing your accounting books.
List of expenses in accounting
You can create a separate expense sub-account for all the expenses you have, like rent and insurance payments.
For a list of expenses in accounting, take a look at this expense account example:
Keep in mind that this is not an all-inclusive list. You may have other expenses that require a separate expense account category, like business loan payments. Again, anything you spend money on relating to your business is considered an expense.
Looking for a simple yet powerful accounting software to track your expenses? Look no further! Patriot’s accounting software makes it easy to track your outgoing (and incoming) funds. Start your self-guided demo to see what our software can do for you!
This article is updated from its original publication date of October 24, 2019.This is not intended as legal advice; for more information, please click here.