All organizations, regardless of their size, have a common responsibility, and that is keeping their accounting books balanced. Frankly, this can be a burden to most financial departments, as registering business expenses or managing profit and loss statements are still manual processes in many companies.
One of the financial tasks that has a big influence on organizations and is still managed manually, is expense accounting. An incorrect portrayal of these expenses can affect the organization’s financial resources, but also decrease its credibility and status. In order to avoid these inconveniences, businesses have started to utilize software solutions to automate expense accounting.
In case you are not familiar with expense accounting, don’t worry! In this blog, we will cover what expense accounts are, we will talk about the different types, and look at some examples of expense accounts. In the end, we will also present you with an efficient and intelligent solution to automate your expense management processes.
What are Expense Accounts?
Expense accounts are records of the amount a company needs to pay over a period of time, usually a quarter or a year. They are considered temporary accounts and represent the running total of business expenses for a predetermined period.
Expenses in accounting appear in a company’s income statement and help the financial department keep track of various expenses the business makes. When company funds are debited, the expense accounts increase.
On the contrary, when funds are credited from another account, the expenses account decreases. The goal of expense accounts is to bring the debits and credits to a balanced account at the end of the bookkeeping period.
Expense accounts vary in type, depending on the nature of the payments a business needs to make. Some of these payments occur on a regular basis, while others only occur in case of a special occasion, such as a business trip. Let’s delve deeper into the topic of expenses in accounting and discover the types of expenses a business can encounter.
Types of Expenses
Expenses in accounting, as mentioned earlier, follow different patterns. Essentially, expenses can be classified into three categories:
- Fixed vs. variable
- Operating vs. non-operating
- Deductible vs. non-deductible
Fixed vs. Variable Expenses
Fixed expenses, such as taxes, salaries, or rent, are expenses that are essential to the organization. They help sustain the organization and make sure the company has all the necessary resources to function properly.
Variable expenses, on the other hand, are the expenses that tend to vary between quarters or years, including internal training or company travel expenses. They depend solely on the business’s activity and its financial behavior.
Operating vs. Non-operating Expenses
As the name suggests, operating expenses fall under the payments a business needs to make in order to facilitate business operations. This category includes things like advertising costs, outsourcing expenses, and other variable expenses. Therefore operating expenses vary based on the specific needs of an organization.
On the contrary, non-operating expenses are payments that don’t interfere with an organization’s activity. These expenses help balance financial statements or, for instance, secure mortgage payments or loans, but do not actively impact a business’s activity.
Deductible vs. Non-deductible Expenses
Deductible expenses are deducted from the business’s taxable income. They reduce tax liability and can be fully or partially deductible. In addition, these expenses are necessary for organizations to stay compliant with government regulations and other legal frameworks.
Non-deductible expenses are simply expenses that cannot be deducted from an organization’s capital or cannot be reimbursed to employees. In this category, a very good example would be personal expenses, such as meals during a company trip that exceed a certain amount.
Expense accounts can be classified as diverse, as they differ according to the specific needs of a company. To better understand which expenses fall under each category, let’s take a look at some expense account examples.
Expense Account Examples
Organizations need to bear the costs of certain expenses in order to develop their core activity. These costs vary for each company, however, some expenses are encountered in every business.
Most important expense accounts are fixed and they cover costs such as taxes, rent, utility bills, and salaries. Moreover, inventory costs, as well as hardware and software costs, are also necessary expenses a business has to account for.
Additionally, company travel expenses, marketing and advertising costs, employee perks, and office improvements are expenses found in almost every organization. While these expenses are variable, they are essential to make the business perform well and increase employee satisfaction.
Not to mention, expense accounts are also an important part of a company’s accounts payable process. They cover important costs that help develop a business, but also its employees. If you are still not convinced of the importance of an expense account, keep reading!
Why Do You Need an Expense Account?
An expense account ensures that organizations manage their expenses in an accurate manner and that all upcoming payments, such as accrued expenses, are taken into consideration. We have highlighted some of the reasons why an expense account is beneficial to businesses:
- It helps companies avoid fraudulent activities: Expense accounting ensures all expenses are tracked, avoiding any risks of invoice fraud.
- It improves bookkeeping processes: An expense account helps financial experts separate assets from liabilities, improving accounts payable accuracy.
- It keeps track of a company’s expense flow: Expenses in accounting differentiate the fixed and variable expenses, analyzing the expense flow of an organization.
Expenses in accounting are a great way of ensuring that accounting processes are accurately represented in the books. What would make this process even better, and therefore more useful for companies, is automation.
For instance, Klippa SpendControl helps companies significantly improve expense management processes in their organization, by automating all accounting-related tasks.
Manage Expense Accounts with Klippa SpendControl
Klippa SpendControl is an all-in-one digital platform that automates expense management processes, helping financial experts keep track of all expenses within their company. It allows organizations to:
- Submit expenses conveniently via the app or website
- Accurately scan and extract information using OCR technology
- Create a secure authorization flow, with advanced approval options
- Easily approve expense claims, via app or website
- Benefit from seamless integrations with your ERP system, which helps keep the bookkeeping system up-to-date
- Duplicate receipt or invoice detection to avoid double payments
- Have a clear overview of all expenses
Improve the accuracy of your company’s expense accounting and automate all expense management-related tasks. Book a free demo down below or contact one of our experts for more information!