Expense account

Last updated

An expense account is the right to reimbursement of money spent by employees for work-related purposes. [1] Some common expense accounts are Cost of sales, utilities expense, discount allowed, cleaning expense, depreciation expense, delivery expense, income tax expense, insurance expense, interest expense, advertising expense, promotion expense, repairs expense, maintenance expense, rent expense, salaries and wages expense, transportation expense, supplies expense and refreshment expense. [2]

Contents

Normal Balance

To increase an expense account, it must be debited. [3] To decrease an expense account, it must be credited. [3] The normal expense account balance is a debit. [3] In order to understand why expenses are debited, it is relevant to note the accounting equation, Assets = Liabilities + Equity. [4] Expenses show up under the equity portion of the equation because equity is common stock plus retained earnings and retained earnings are revenues minus expenses minus dividends. [2] Expenses are considered temporary accounts in this equation, because at the end of the period, expense accounts are closed. [4] Because expense accounts decrease the credit balance of owner's equity, expenses must be debited. [5]

Closing Expense Accounts

At the end of the year, expense accounts need to be closed, or zeroed out. [6] Expense accounts need to be closed because they are temporary, meaning that they pertain only to a given accounting period and won't carry over into the next one. [2] When expense accounts are closed, they close to another temporary account, known as Income Summary. [2] So, the expense accounts must be credited, and the Income Summary will be debited. [2] [6] The net loss or gain in this account transfers to Retained Earnings, which is a permanent account. [4]

Contra Expense Accounts

Contra accounts are accounts that are related, yet separate from its particular account. [7] A contra expense account will behave in the opposite way a normal expense account will; instead of debiting to increase, a contra account must credit to increase. [7] Instead of crediting to decrease, it will be credited to increase. [7] An example of a contra expense account is Purchase Returns and Allowances. [4]

US tax treatment of expense accounts

In the United States, the use of an expense account can be traced back to George Washington, who chose to forego a salary and relied on an expense account to cover his purchases during his military leadership in the American Revolution. [8]

Under today's tax laws of the United States, expense accounts are treated as either "accountable" or "unaccountable". Accountable expense accounts are subject to a variety of Internal Revenue Service regulations. There must be a documented business purpose for the account. Spending from the account must be documentable, typically by means of receipts. Any money entrusted to the employee from the account that is not spent for business purposes and accounted for must be returned to the employer. [9]

Money paid to an employee under an accountable expense account is not treated as taxable income to the employee; Where as money paid to an employee under an unaccountable plan is treated as income to the employee. Business expenses paid out of a nonaccountable plan are deductible from the employee's taxable income only as miscellaneous itemized deductions, and even then, they are only deductible if the expenses are equal to or greater than 2% of the employee's income.

Special rules govern certain types of business expenses, including rules for travel, entertainment, food, and gifts. [10]

Expense accounts are also privately regulated by internal auditors for many employers, often to ensure funds are handled appropriately. [1] [11]

See also

Related Research Articles

<span class="mw-page-title-main">Bookkeeping</span> Recording financial transactions or events

Bookkeeping is the recording of financial transactions, and is part of the process of accounting in business and other organizations. It involves preparing source documents for all transactions, operations, and other events of a business. Transactions include purchases, sales, receipts and payments by an individual person, organization or corporation. There are several standard methods of bookkeeping, including the single-entry and double-entry bookkeeping systems. While these may be viewed as "real" bookkeeping, any process for recording financial transactions is a bookkeeping process.

Double-entry bookkeeping, also known as double-entry accounting, is a method of bookkeeping that relies on a two-sided accounting entry to maintain financial information. Every entry to an account requires a corresponding and opposite entry to a different account. The double-entry system has two equal and corresponding sides, known as debit and credit; this is based on the fundamental accounting principle that for every debit, there must be an equal and opposite credit. A transaction in double-entry bookkeeping always affects at least two accounts, always includes at least one debit and one credit, and always has total debits and total credits that are equal. The purpose of double-entry bookkeeping is to allow the detection of financial errors and fraud.

In accounting, revenue is the total amount of income generated by the sale of goods and services related to the primary operations of the business. Commercial revenue may also be referred to as sales or as turnover. Some companies receive revenue from interest, royalties, or other fees. "Revenue" may refer to income in general, or it may refer to the amount, in a monetary unit, earned during a period of time, as in "Last year, company X had revenue of $42 million". Profits or net income generally imply total revenue minus total expenses in a given period. In accounting, revenue is a subsection of the equity section of the balance statement, since it increases equity. It is often referred to as the "top line" due to its position at the very top of the income statement. This is to be contrasted with the "bottom line" which denotes net income.

In accounting, book value is the value of an asset according to its balance sheet account balance. For assets, the value is based on the original cost of the asset less any depreciation, amortization or impairment costs made against the asset. Traditionally, a company's book value is its total assets minus intangible assets and liabilities. However, in practice, depending on the source of the calculation, book value may variably include goodwill, intangible assets, or both. The value inherent in its workforce, part of the intellectual capital of a company, is always ignored. When intangible assets and goodwill are explicitly excluded, the metric is often specified to be tangible book value.

An expense is an item requiring an outflow of money, or any form of fortune in general, to another person or group as payment for an item, service, or other category of costs. For a tenant, rent is an expense. For students or parents, tuition is an expense. Buying food, clothing, furniture, or an automobile is often referred to as an expense. An expense is a cost that is "paid" or "remitted", usually in exchange for something of value. Something that seems to cost a great deal is "expensive". Something that seems to cost little is "inexpensive". "Expenses of the table" are expenses for dining, refreshments, a feast, etc.

Debits and credits in double-entry bookkeeping are entries made in account ledgers to record changes in value resulting from business transactions. A debit entry in an account represents a transfer of value to that account, and a credit entry represents a transfer from the account. Each transaction transfers value from credited accounts to debited accounts. For example, a tenant who writes a rent cheque to a landlord would enter a credit for the bank account on which the cheque is drawn, and a debit in a rent expense account. Similarly, the landlord would enter a credit in the rent income account associated with the tenant and a debit for the bank account where the cheque is deposited.

<span class="mw-page-title-main">Income statement</span> Type of financial statement

An income statement or profit and loss account is one of the financial statements of a company and shows the company's revenues and expenses during a particular period.

Financial accounting is a branch of accounting concerned with the summary, analysis and reporting of financial transactions related to a business. This involves the preparation of financial statements available for public use. Stockholders, suppliers, banks, employees, government agencies, business owners, and other stakeholders are examples of people interested in receiving such information for decision making purposes.

In the United States, a flexible spending account (FSA), also known as a flexible spending arrangement, is one of a number of tax-advantaged financial accounts, resulting in payroll tax savings. One significant disadvantage to using an FSA is that funds not used by the end of the plan year are forfeited to the employer, known as the "use it or lose it" rule. Under the terms of the Affordable Care Act however a plan may permit an employee to carry over up to $550 into the following year without losing the funds but this does not apply to all plans and some plans may have lower limits.

A trial balance is an internal financial statement that lists the adjusted closing balances of all the general ledger accounts contained in the ledger of a business as at a specific date. This list will contain the name of each nominal ledger account in the order of liquidity and the value of that nominal ledger balance. Each nominal ledger account will hold either a debit balance or a credit balance. The debit balance values will be listed in the debit column of the trial balance and the credit value balance will be listed in the credit column. The trading profit and loss statement and balance sheet and other financial reports can then be produced using the ledger accounts listed on the same balance.

In business and accounting, net income is an entity's income minus cost of goods sold, expenses, depreciation and amortization, interest, and taxes for an accounting period.

A chart of accounts (COA) is a list of financial accounts and reference numbers, grouped into categories, such as assets, liabilities, equity, revenue and expenses, and used for recording transactions in the organization's general ledger. Accounts may be associated with an identifier and a caption or header and are coded by account type. In computerized accounting systems with computable quantity accounting, the accounts can have a quantity measure definition. Account numbers may consist of numerical, alphabetic, or alpha-numeric characters, although in many computerized environments, like the SIE format, only numerical identifiers are allowed. The structure and headings of accounts should assist in consistent posting of transactions. Each nominal ledger account is unique, which allows its ledger to be located. The accounts are typically arranged in the order of the customary appearance of accounts in the financial statements: balance sheet accounts followed by profit and loss accounts.

Per diem or daily allowance is a specific amount of money that an organization gives an individual, typically an employee, per day to cover living expenses when travelling on the employer's business.

The fundamental accounting equation, also called the balance sheet equation, is the foundation for the double-entry bookkeeping system and the cornerstone of accounting science. Like any equation, each side will always be equal. In the accounting equation, every transaction will have a debit and credit entry, and the total debits will equal the total credits. In other words, the accounting equation will always be "in balance".

Reimbursement is the act of compensating someone for an out-of-pocket expense by giving them an amount of money equal to what was spent.

In financial accounting, reserve always has a credit balance and can refer to a part of shareholders' equity, a liability for estimated claims, or contra-asset for uncollectible accounts.

<span class="mw-page-title-main">Fund accounting</span> An accounting system used for special reporting requirements

Fund accounting is an accounting system for recording resources whose use has been limited by the donor, grant authority, governing agency, or other individuals or organisations or by law. It emphasizes accountability rather than profitability, and is used by nonprofit organizations and by governments. In this method, a fund consists of a self-balancing set of accounts and each are reported as either unrestricted, temporarily restricted or permanently restricted based on the provider-imposed restrictions.

<span class="mw-page-title-main">FSA debit card</span> Debit card tied to flexible spending account

A FSA Debit Card is a type of debit card issued in the United States against a special tax-favoured spending accounts. These include accounts such as flexible spending accounts (FSA), health reimbursement accounts (HRA), and sometimes health savings accounts (HSA).

An employer in the United States may provide transportation benefits to their employees that are tax free up to a certain limit. Under the U.S. Internal Revenue Code section 132(a), the qualified transportation benefits are one of the eight types of statutory employee benefits that are excluded from gross income in calculating federal income tax. The qualified transportation benefits are transit passes, vanpooling, bicycling, and parking associated with these things.

<span class="mw-page-title-main">Partnership accounting</span>

When two or more individuals engage in enterprise as co-owners, the organization is known as a partnership. This form of organization is popular among personal service enterprises, as well as in the legal and public accounting professions. The important features of and accounting procedures for partnerships are discussed and illustrated below.

References

  1. 1 2 Brian Satterfield (May 29, 2008). "5 Tales of Outrageous Expense Account Abuse". HR World. Archived from the original on 2009-03-21. Retrieved 2009-03-13.
  2. 1 2 3 4 5 Kieso, Paul D. Kimmel, Jerry J. Weygandt, Donald E. (2012). Financial accounting Tools for business decision making (7th rev. ed.). New York: John Wiley & Sons Inc. ISBN   9781118162286.{{cite book}}: CS1 maint: multiple names: authors list (link)
  3. 1 2 3 Austin Community College. "Rules of Debits and Credits".{{cite web}}: Missing or empty |url= (help)
  4. 1 2 3 4 Bluest, Kate. "Why Do Assets and Expenses Both Have a Debit Balance?". Demand Media.{{cite web}}: Missing or empty |url= (help)
  5. ↑ Crosson, Belverd E. Needles, Marian Powers, Susan V. (2014). Principles of accounting (12th ed.). Mason, OH: Cengage Learning. ISBN   978-1-133-62698-5.{{cite book}}: CS1 maint: multiple names: authors list (link)
  6. 1 2 Nelson, Stephen, L. "Close Out Revenue and Expense Accounts in QuickBook 2012". John Wiley & Sons.{{cite web}}: Missing or empty |url= (help)CS1 maint: multiple names: authors list (link)
  7. 1 2 3 Kimmel, Paul, D. John Wiley & Sons http://www.wiley.com/legacy/products/worldwide/canada/kimmel/student/s_faq_04.html . Retrieved 8 April 2014.{{cite web}}: Missing or empty |title= (help)CS1 maint: multiple names: authors list (link)
  8. ↑ Marvin Kitman (2001). George Washington's Expense Account. Grove Press. ISBN   0-8021-3773-3.
  9. ↑ Internal Revenue Service, Publication 535 (2007), Business Expenses, ch. 11: Reimbursement of Travel, Meals, and Entertainment
  10. ↑ Internal Revenue Service, Publication 463 (2008), Travel, Entertainment, Gift, and Car Expenses, 2008 version.
  11. ↑ Paul Burnham Finney (June 26, 2006). "A high-tech tool to track expense account abuse". International Herald Tribune. Retrieved 2009-03-13.
This page is based on this Wikipedia article
Text is available under the CC BY-SA 4.0 license; additional terms may apply.
Images, videos and audio are available under their respective licenses.