Expense Accounting Definition Examples Journal Entries

Expense Accounting Definition

Recording Expenses in Accounting with Examples

#1 – Invoice booking

As soon as we receive the invoice from a Vendor, it is booked by the accounts payable associate. While booking the invoice, the associate must check the date of the invoice, the period it relates to, any change in payment instructions,Value-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.read more 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.read more 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 an accounting record that compiles every financial transaction of a firm to provide accurate entries for financial statements. The double-entry bookkeeping requires the balance sheet to ensure that the sum of its debit side is equal to the credit side total. A general ledger helps to achieve this goal by compiling journal entries and allowing accounting calculations. read more team, checking 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.

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 identifying and considering expenses in the current accounting period. In real-life situations, for various reasons, we often don’t receive invoices from Vendors on time or are stuck in transit.

In those cases, when we are sure 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.

Let’s say that Vendor X had supplies Tea & Coffee for $4,000 in June 2019; however, the invoice is not yet received; in this case, the following entries will be posted –

Journal when accrual is booked –

Journal when an invoice is received –

#3 – Prepaids

Sometimes we get the annual or quarterly invoices from Vendors, which we have to pay in advance. We also must spread those expenses over the corresponding period while recognizing them in the books.

It shows the expense amount related to Prepaids in the balance sheet and releases the current period amount to the profit & loss account.

Let’s say that Vendor X bills a company quarterly in advance for office air conditioner maintenance. In July, a bill of $4,500 was received for the July-September 2019 period. While doing accounting in July, $1500 is released to Profit & Loss A/C, and $3,000 is shown as a prepaid asset on 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.read more.

Subsequently, in August & September 2019, $1500 is released to the Profit & Loss account as monthly expenses. Here is theAccounting 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. read more 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. read more –

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 –

#4 – Payments

It is a crucial step involving 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 current 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.

Advantages

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.read more represent an accurate and fair view of the financial status of an entityAudit facilitation becomes easy as expenses are recognized in the period to which it relatesTax 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.read more calculation, and other statutory compliance becomes easierImproves public faith and investors trust which is good for businessData 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.read more and various decision-making stepsImproved 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.read more

Points to Note about Changes in Expense Accounting

In today’s globalization and increasing compliance requirements, 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.

Conclusion

Expense accounting is a vital part of the overall accounting process as the data is used for planning, budgeting, and decision-making. A goodAn 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.read more 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.read more mechanism goes a long way in the growth of any organization, so every organization must have a robust system and qualified personnel for expense reporting.