Expense Accounting Definition
Expense accounting refers to the identification of expenses in the current accounting period which involves a lot of judgment and accounting data analysis. It includes booking invoices, creating new vendors in the system, VAT accounting, accruals, prepaid, vendor ledger analysis, timely payments, etc.
Recording Expenses in Accounting with Examples
#1 – Invoice booking
As soon as we receive the invoice from a Vendor, it is booked by accounts payable associate. While booking the invoice, the associate must check the date of the invoice, period it relates to, any change in payment instructions, VATVATValue-added tax (VAT) refers to the charges imposed whenever there is an accretion to a product's usefulness or value throughout its supply chain, i.e., from its manufacturing to its final selling point. It is an indirect tax levied on the product consumption. if any, and other details. Once the associate has booked the invoice it goes for further approval to the General LedgerGeneral LedgerA general ledger is a book of accounts that records the everyday business transactions in separate ledger accounts. The entries made in a ledger can be verified by getting a NIL balance on summing up all the ledger account amounts in the trial balance. team, which checks if the account coding is correct.
After that, it goes to the department head for approval to check if the expense is valid and expected. Once it goes through the approval process, the invoice goes to the treasury for payment.
Accounting entry on Invoice Booking
Let’s say we receive an invoice for $1,000 for marketing expense –
Journal when the invoice is booked –
Journal when an invoice is Paid –
#2 – Accrual of Expenses
One of the most critical aspects of expense accounting is to identify and consider the expenses in the current accounting period. In real-life situations, many times, due to various reasons, we don’t receive invoices from Vendors on time, or they are stuck in transit.
In those cases, when we are sure that we will receive the invoice, we post the accrual entries. Accrual is a process of recognizing the current period expenses even though we have not received the invoices from the Vendor.
Accounting Entry for Accruals
Let’s say that Vendor X had supplies Tea & Coffee for $4,000 on June 2019 however, the invoice is not yet received, in this case following entries will be posted –
Journal when accrual is booked –
Journal when an invoice is received –
Journal when an invoice is Paid –
#3 – Prepaids
Sometimes we get the annual or quarterly invoices from Vendors, which we have to pay in advance. We also have to spread those expenses over the related period while recognizing it in the books.
It shows the expense amount related to Prepaids in the balance sheet, and it releases the current period amount to profit & loss account.
Accounting Entry for Prepaids
Let’s say that Vendor X bills a company quarterly in advance for office air conditioners maintenance. In July, a bill of $4,500 is received for July-September 2019 period. While doing accounting in July months, $1500 is released to Profit & Loss A/C, and $3,000 is shown as a prepaid asset in the balance sheetBalance SheetA balance sheet is one of the financial statements of a company that presents the shareholders' equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner's capital equals the total assets of the company..
Subsequently, in August & September 2019, $1500 is released to Profit & Loss account as monthly expenses. Here is the accounting entryAccounting EntryAccounting Entry is a summary of all the business transactions in the accounting books, including the debit & credit entry. It has 3 major types, i.e., Transaction Entry, Adjusting Entry, & Closing Entry. –
In July –
Journal when prepaid is booked –
Journal when an invoice is paid –
In August –
Journal when prepaid is released –
In the month of September –
Journal when prepaid is released –
#4 – Payments
It is a crucial step as it involves outgoing funds, which must not go to an incorrect account. The person setting up the payment must ensure that the account is set up correctly and verified twice.
Also, while making payments, the currency setup is essential. If we pay EURO in place of USD, the bank will charge extra for currency conversion, and the Vendor will also receive additional payment.
- Financial statementsFinancial StatementsFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels. represent an accurate and fair view of the financial status of an entity
- Audit facilitation becomes easy as expenses are recognized in the period to which it relates
- Tax filing, transfer pricingTransfer PricingTransfer pricing is determined for the transactions between two or more related entities within a multi-company organization. It shows the value of transfer between the associated entities in terms of goods or transfer of employees, labours across different departments. calculation, and other statutory compliance becomes easier
- Improves public faith and investors trust which is good for business
- Data is used for budgetingBudgetingBudgeting is a method used by businesses to make precise projections of revenues and expenditure for a future specific period of time while taking into account various internal and external factors prevailing at that time. and various decision-making steps
- Improved relationship with banks makes it easy for financing activitiesFinancing ActivitiesThe various transactions that involve the movement of funds between the company and its investors, owners, or creditors in order to achieve long-term growth are referred to as financing activities. Such activities can be analyzed in the financial section of the company's cash flow statement.
Points to Note about Changes in Expense Accounting
In today’s globalization and increasing compliance requirement, the process keeps changing. With the introduction of IFRS globally, there are considerable changes in the expense accounting process, so the accountants have to ensure that implementation is smooth, and the organization is IFRS ready.
Expense accounting is a vital part of the overall accounting process as the data is used for planning, budgeting, and decision-making processes. A good expense reportExpense ReportAn expense report refers to a form served for requesting reimbursement or disclosing all the monthly, quarterly or yearly spendings an employee does on the company's behalf. In most cases, the expense receipts are also attached with it for evidence. mechanism in place goes a long way in the growth of any organization, so every organization must have a robust system and qualified personnel for expense reporting.
This article has been a guide to Expense Accounting and its definition. Here we discuss examples of expense accounting with its journal entries, including invoice booking, prepaid, etc. You may learn more about our articles below on investment banking –