What is the Expense Report?
The expense report is defined as the type of report that documents the expenses incurred by the business or by the employees of the business and can be maintained on a monthly basis, quarterly basis or on an annual basis.
Explanation
- Each small-sized to medium-sized business maintains an expense report.
- Mid-management level or the departmental level prepare such reports.
- It can be broken down into smaller divisions to determine as to which area or department of the business is costing more to the organization.
- The company maintains such reports for the purpose of auditPurpose Of AuditThe primary purpose of an audit is to conduct an independent and unbiased verification of all financial and non-financial material information to ensure that it is in line with what the management has reported.read more.
- They submit this report to the top management of the business. The top management decides which expenseExpenseAn expense is a cost incurred in completing any transaction by an organization, leading to either revenue generation creation of the asset, change in liability, or raising capital.read more to reimburse to the employee and which not.
- The reimbursed expenses are then utilized in recognition of the taxable and accounting profitAccounting ProfitAccounting profit is the net income available after deducting all explicit costs and expenses from total revenue, and it is calculated in accordance with generally accepted accounting principles (GAAP). Operating expenses, labour, transportation, and sales expenses are common examples of these costs.read more.
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For eg:
Source: Expense Report (wallstreetmojo.com)
Features
- The expense report consists of the expense policy of the employer for its employees. It also documents the travel and entertainment policy as per which expenses won’t be reimbursed to the employee by the employer.
- It is maintained and prepared by the expense and payrollPayrollPayroll refers to the overall compensation payable by any organization to its employees on a certain date for a specific period of services they have provided in the entity. This total net pay comprises salary, wages, bonus, commission, deduction, perquisites, and other benefits.read more department of the organization. When they receive the employee reimbursement and claim form, they are the ones who would verify the details of the expenditure made by the employee as shared under applicable receipts and proofs and prepare the employee wise report.
How to Create an Expense Report?
Different organizations operating in different industries have different methods and templates. However, the payroll and expense reporting department of any organization should follow the following steps to create and formulate –
- The payroll department should have approvals on expense policy from respective departments of the organization.
- Basis the applicable policy, the executive should access the online expense entry system or perform data entry in the consolidated excel.
- The executive should enter the date of incurring the expense.
- The executive should enter the expense amount and mention the applicable vendor name.
- After revising the entered information, as mentioned in the receipt, the executive should submit the report to the next level approval.
Example of Expense Report
Let us take the example of ABC Inc. The employee is traveling to the onsite to pitch a new project. On 23 Jan 2019, the employee presented a meal expense of $200, the hotel cost of $100, and misc. cost of $250. On 24 Jan 2019, the employee reported entertainment and movie expenses of $130, along with a meal expense of $230 and a Hotel to stay expense of $500.
Help the payroll executive to prepare the report of the employee’s reported expenditure.
Solution:
Prepare the Expense Report as shown below: –
The following would be the results: –
Columns of Expense Report
The columns normally would be composed of the following details: –
- The expense incurred date.
- The type or nature of expenditure;
- The name of the vendor from where services were taken or items was purchased.
- The expense amounts.
- The name of the head of the account where it should be mentioned and charged.
- Deduction and adjustments on prior submissions made by the employees;
- Each account type should be subtotalled.
- The total of the overall amount to be reimbursed as requested by the employee.
Importance and Usage
The expense reports are maintained to drive accountability in terms of spending habits of the organization. These are the reports which could be referenced in the event of financial dispute and audit activities. With proper maintenance and accountability of these reports on a periodic and regular basis ensures that your employees are 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.read more in full accountability to keep the business financially protected and viable.
Such reports make both employee and employer accountable to business in terms of their spending habits. Some expenses enjoy deduction on the taxable income as per the income tax laws, and therefore to enjoy such deductions, big corporations have to submit a consolidated report to the revenue department of the country. It can be submitted as a supplementary document along with reporting of total applicable expenses in the tax forms while filing for taxes with the revenue service.
Benefits
- The expense report makes it easier for the auditor to verify the details of expenses as claimed by the business.
- It allows them to verify expense details with the receipts as available and attached by the employees.
- It strengthens the internal controlInternal ControlInternal control in accounting refers to the process by which a company implements various rules, policies, or procedures to ensure the accuracy of accounting and finance information, safeguard the various assets of the business, promote accountability in the business, and prevent the occurrence of frauds in the company.read more.
- It itemizes which expense item is reimbursable and which is not reimbursable.
- There is the availability of many IT software in the markets that allow the business to prepare, formulate, and customize reports.
Drawbacks
- They are suitable for a big corporation and not for solo entrepreneurs and micro-enterprises.
- These reports may not tally with the receipts as enclosed by the employees due to errors in data entry of information.
- In simpler words, the reports are always prone to misrepresentations and accounting frauds.
- It increases administration costs of handling items and regular updating of expense items in the reporting system.
- It is very hard to monitor each expense item under the expense policy issued if the size of the organization is very big.
Conclusion
The expense reports can be regarded as reports that highlight the type of expenses that can be reimbursed and the type of expenses that cannot be reimbursed. The reimbursement of expenses happens as per the applicable tax laws of the nation and the applicable expense policy of the employer. It could be useful for large organizations that normally incur huge expenditures on day to day basis and helps in the streamlining of the overall process.
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