An expense account is the right to reimbursement of money spent by employees for work-related purposes. Some common expense accounts are: Cost of sales, utilities expense, discount allowed, cleaning expense, depreciation expense, delivery expense, income tax expense, insurance expense, interest expense, advertising expense, promotion expense, repairs expense, maintenance expense, rent expense, salaries and wages expense, transportation expense, supplies expense and refreshment expense.

Normal Balance

To increase an expense account, it must be debited. To decrease an expense account, it must be credited. The normal expense account balance is a debit. In order to understand why expenses are debited, it is relevant to note the accounting equation, Assets = Liabilities + Equity. Expenses show up under the equity portion of the equation because equity is common stock plus retained earnings and retained earnings are revenues minus expenses minus dividends. Expenses are considered temporary accounts in this equation, because at the end of the period, expense accounts are closed. Because expense accounts decrease the credit balance of owner’s equity, expenses must be debited.

Closing Expense Accounts

At the end of the year, expense accounts need to be closed, or zeroed out. Expense accounts need to be closed because they are temporary, meaning that they pertain only to a given accounting period and won’t carry over into the next one. When expense accounts are closed, they close to another temporary account, known as Income Summary. So, the expense accounts must be credited, and the Income Summary will be debited. The net loss or gain in this account transfers to Retained Earnings, which is a permanent account.

Contra Expense Accounts

Contra accounts are accounts that are related, yet separate from its particular account. A contra expense account will behave in the opposite way a normal expense account will; instead of debiting to increase, a contra account must credit to increase. Instead of crediting to decrease, it will be credited to increase. An example of a contra expense account is Purchase Returns and Allowances.

US tax treatment of expense accounts

In the

United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territorie ...

, the use of an expense account can be traced back to

George Washington George Washington (February 22, 1732, 1799) was an American military officer, statesman, and Founding Father who served as the first president of the United States from 1789 to 1797. Appointed by the Continental Congress as commander of th ...

, who chose to forego a salary and relied on an expense account to cover his purchases during his military leadership in the

American Revolution The American Revolution was an ideological and political revolution that occurred in British America between 1765 and 1791. The Americans in the Thirteen Colonies formed independent states that defeated the British in the American Revolut ...

. Under today's tax laws of the United States, expense accounts are treated as either "accountable" or "unaccountable". Accountable expense accounts are subject to a variety of

Internal Revenue Service The Internal Revenue Service (IRS) is the revenue service for the United States federal government, which is responsible for collecting U.S. federal taxes and administering the Internal Revenue Code, the main body of the federal statutory ta ...

regulations. There must be a documented business purpose for the account. Spending from the account must be documentable, typically by means of

receipt A receipt (also known as a packing list, packing slip, packaging slip, (delivery) docket, shipping list, delivery list, bill of the parcel, manifest, or customer receipt) is a document acknowledging that a person has received money or propert ...

s. Any money entrusted to the employee from the account that is not spent for business purposes and accounted for must be returned to the employer. Money paid to an employee under an accountable expense account is not treated as

taxable income Taxable income refers to the base upon which an income tax system imposes tax. In other words, the income over which the government imposed tax. Generally, it includes some or all items of income and is reduced by expenses and other deductions. Th ...

to the employee; Where as money paid to an employee under an unaccountable plan is treated as income to the employee. Business expenses paid out of a nonaccountable plan are deductible from the employee's taxable income only as miscellaneous

itemized deduction Under United States tax law, itemized deductions are eligible expenses that individual taxpayers can claim on federal income tax returns and which decrease their taxable income, and is claimable in place of a standard deduction, if available. Most ...

s, and even then, they are only deductible if the expenses are equal to or greater than 2% of the employee's income. Special rules govern certain types of business expenses, including rules for travel, entertainment, food, and gifts. Expense accounts are also privately regulated by internal

auditor An auditor is a person or a firm appointed by a company to execute an audit.Practical Auditing, Kul Narsingh Shrestha, 2012, Nabin Prakashan, Nepal To act as an auditor, a person should be certified by the regulatory authority of accounting and au ...

s for many employers, often to ensure funds are handled appropriately.

References

External links

That Expense-Account Science
''

The New York Times ''The New York Times'' (''the Times'', ''NYT'', or the Gray Lady) is a daily newspaper based in New York City with a worldwide readership reported in 2020 to comprise a declining 840,000 paid print subscribers, and a growing 6 million paid ...