Sometimes, employees have to pay for business expenses from their own pockets. Whether that’s for travel accommodation, business lunches, or office supplies, part of your job as a business owner is to reimburse them for those expenses.
That’s where a document known as an expense report comes in.
An expense report, or expense form, is filled by employees to request compensation for expenses they’ve made on behalf of the business.
In this guide, we will go through the details of what an expense report is, why you need it, what elements it includes, and everything else you need to know to manage expense reports for your small business accounting.
Here’s what you’ll learn:
- What Is An Expense Report?
- Why Do You Need An Expense Report?
- What Does An Expense Report Include?
- How To Manage Expense Reporting (Step-by-Step)
- Automate Your Expense Reports with Accounting Software
- Expense Report FAQ
What Is An Expense Report?
An expense report is a form that lists the most important details of a business expense.
Usually, this form is filled out by employees, to report the business expenses they’ve covered with their own money. The document serves as a request for reimbursement for those expenses.
As a business owner, it’s your responsibility to create an expense report template employees can fill out, as well as double-check the validity of their compensation requests.
Why Do You Need An Expense Report?
As we’ve already mentioned, an expense report is crucial to reimbursing your employees.
By providing expense forms to your workers, you can get insight on when, where, and how much they have spent on the business. This allows you to make sure that the expenses presented are authorized business expenses, and after confirming, you can pay them back the exact owed amount.
Expense reports allow you to properly track all of your expenses, control your costs, and view whether you’re over or under your monthly budget. In other words, the report helps you become more financially aware of your employees’ spending habits and how they impact the overall financial health of the business.
Taxes are another big reason why expense reports are so important. Many business expenses can be deducted, or written-off, from the taxable net income.
So, by keeping track of your employee spendings through expense reports, you can ultimately pay less in taxes at the end of the year.
Now, not all expenses are deductible from your taxable income. According to the IRS, expenses need to qualify as “ordinary and necessary” in order to be written off.
The following are a few examples of “ordinary and necessary” expenses you should look out for when reviewing your employee expense reports:
- Operating expenses such as marketing, advertising, utility, rent, office expenses, payroll, etc.
- Traveling and meal expenses
- Employee benefit programs
- Non-cash expenses such as the stock compensation.
What Does An Expense Report Include?
There aren’t any strict rules or standards to what an expense report should include.
What’s important is that the document itemizes and breaks down the expenses the employee has personally covered on behalf of the company.
Here are some of the most common elements an expense report usually covers:
- Information identifying the person who is submitting the report (name, department, position, contact information).
- The description and nature of the type of expenses incurred, which could be hotel expenses, air tickets, business meals, and so on.
- The date when each expense was made.
- The exact amount paid for every expense.
- The total requested reimbursement figure.
- The name of the account from your business’ chart of accounts where the expense will be charged to.
- An attachment of the corresponding receipt for each expense.
How To Manage Expense Reporting (Step-by-Step)
Here are some beneficial steps you can take to set up a good management system for your expense reporting:
1. Use Premade Templates or Automated Software
Instead of creating an expense form from scratch, consider easing the process by finding premade templates online, and personalizing them to your preference.
Both Microsoft Word and Excel offer plenty of free expense report templates you can tailor to your business brand, in just a few minutes.
And if you’re looking for an even more convenient solution, expense tracking software will become your new best friend. Such platforms not only come with premade expense forms that can be filled out in seconds, but they also allow you to capture and upload receipt pictures. The expense information in those receipts is recognized by the software, and sent out to you, the business owner.
This means your employees won’t have to fill out a form in the first place, as the software automates the entire process on its own. Without anyone having to lift a finger!
2. Save Your Receipts In One File
Even if you opt for a digital solution, it’s a good business practice to hold your physical receipts onto one file.
The general rule of thumb is to keep receipts for as long as the IRS can audit your accounting reports. So, since the IRS typically audits three years worth of records, keep your physical receipts for at least three years.
You can throw away older receipts, but it’s still advisable to invest in online software and keep a digital copy of every document on your cloud.
3. Create and Implement an Expense Policy
If you haven’t already, it’s important that you set up an expense reimbursement policy that lets your employees know what they can purchase on behalf of the business, and how and when they can get reimbursed.
Create guidelines for what counts as a reimbursable expense, outline how employees should report these expenses, where they can access the expense report, and set certain deadlines so that you can close your books in time.
4. Set-Up Routine Audits
Want to save money? Check, check, and then double-check.
Regular audits are not only crucial for catching cases of fraud, but also for helping you understand what your biggest expenditures are, and how you can possibly reduce them.
If you don’t have a ton of employees and out-of-pocket expenses, incorporate only an annual audit process. As your business starts to expand then consider quarterly, or bi-annual auditing.
Automate Your Expense Reports with Accounting Software
By using cloud accounting software you and your employees get to keep tabs on all expenses, and automatically generate expense reports, through a single dashboard.
Spare time and effort by digitally storing data in the cloud and easily managing and accessing it anytime, anywhere, instead of manually creating expense reports, and manually journalizing these expense transactions into spreadsheets.
The best all-in-one, intuitive accounting software for small businesses today is Deskera.
With Deskera, expense management and reporting can be done within seconds.
By just snapping and uploading pictures of your receipts, every detail - vendor, date, price - is automatically coded and queued into the claims request through Deskera’s intelligent algorithm.
The software will then use this data to prepare reports and graphics on your expense claim trends for weekly, monthly, quarterly, and yearly time periods.
And if you want to create a new purchase order, the software has in-built forms you can fill up with your order details, in just a few clicks.
Invoice payments are just as easy to make!
Deskera lets you integrate directly with your business’ bank accounts and pay back vendors and employees, as well as create fund transfers, at the touch of a button.
Expense Report FAQ
1. What Is Considered an Expense?
An expense is considered any cost of operation that businesses incur, in an effort to generate profit. Common expenses include employee payroll, operating expenses, interest expense, cost of goods sold, depreciation or disposal of equipment, and so on.
2. How Do I Review My Expense Reports?
Here are some important tips to keep in mind when reviewing your expense reports:
- Make sure all of your claimed expenses have eligible receipts.
- When dealing with restaurant receipts, check if tips were paid within the guidelines. Also, if your business doesn’t reimburse alcohol purchases, make sure to exclude those from your expense report.
- Double-check your expense report details with the corresponding receipts - ensure that the amount, date, description have been entered correctly.
- Let your workers know if you find any policy-violating expenses.
And that’s a wrap! We hope you found this guide useful in understanding what an expense report is, and how you can create an expense reporting management system that benefits your business.
For a quick recap, here are some of the main points we’ve covered:
- An expense report is a form that your employees fill out, to report their out-of-pocket expenses.
- Usually, the report will include information about the individual who is filing it, the nature of the expenses, the date when they took place, the amount paid, total reimbursement figure, and an attachment of the corresponding receipts.
- An expense report isn’t only useful for employee reimbursements, but it also helps you keep track of your expenses, and pay less in taxes at the end of the year.
- To set up a good expense reporting system you should:
- Use premade expense report templates
- Save your receipts for up to three years
- Implement an expense policy
- Set up routine audits
- Automate your entire expense management with accounting software like Deskera