Reimbursable Expense Accounting: A Guide for Small Businesses
All businesses incur expenses to fund their operation. It is inevitable for employees to sometimes spend their own money on business-related costs to ensure the business operates as expected. In return, business owners are obliged to reimburse employee expenses on time.
With the use of a reimbursable expense accounting system, employers can manage, track and record employee expenses more efficiently with reduced risks for errors and fraud.
What are Reimbursable Expenses?
Reimbursable expenses are the costs related to carrying out activities to achieve the operational purposes of a business. Usually, these are employee expenses that will later be claimed and paid back to them in the form of expense reimbursements. Reimbursable expenses refer to the money spent by the employee on the company’s behalf paid through their own money or personal credit cards.
Reimbursable expenses are the company’s payables and are quite different from billable expenses because the latter refers to the expenses incurred by a business on behalf of another business. Sometimes, your company will conduct activities for a client such as research and planning which require payments.
If a reimbursable expense is initially paid by an employee, a billable expense is a revenue-generating purchase for a client or customer equivalent to the cost of goods sold. On the other hand, if a company spends for its customers and clients, then the spending will be referred to as a billable expense income account considered as receivable into the company’s bank account.
Important Expense Categories for Startups and Small Businesses
Business expenses are the costs required to generate sales for all types of businesses. Identifying and creating a list of expense categories for reimbursement is important especially for startups and small businesses to align their finances for tax deductions. If small business owners do not handle and track their employee expenses properly, they might spend more than necessary during the tax season. An expense category should include those spending that is necessary and commonly acceptable in the business industry.
Here are some of the essential employee expense categories you might want to use for your startup that will compose your list of reimbursed expenses:
This is the most common type of reimbursable expense which employees spend for and need to claim from the company. When employees go out to buy office supplies, they need to pay for their transport from the office to the store and vice versa.
The cost of travel is considered a reimbursable expense. Moreover, if employees are required to attend an out-of-town training, then the cost of plane tickets or fuel consumed or parking fees during the travel should be a reimbursable expense.
Employees who need to stay out of town will also need to spend on accommodations where they can stay while away from home. Companies with defined reimbursable accommodation expenses should not worry much unless the approved type of accommodation is not available. Just make it clear that any upgrades or downgrades shall be covered by the employees and no extra services will be paid off by the company.
Meals and entertainment
Depending on the company’s expense reimbursement policy, you may reimburse an employee’s expense on meals and entertainment in full or in part. If your company has set a budget for a daily meal expense allowance, then any employee meal expense should be reimbursable.
Meals and entertainment are somehow difficult to manage especially when paid through credit cards. However, if you have set the rules from the start, then employees will be restricted to make reasonable expense claims for this category.
Office expenses and supplies
Although most companies are gradually shifting to the work-from-home scheme, some processes still require office supplies. Printing of documents is a basic office expense which your business should reimburse. Notebooks, stationery, cleaning products, and pens are simple office items that should be recorded once purchased.
Office expenses and supplies should be detailed in the balance sheet especially if you need to track down the frequency of purchase and the extent of usage.
The cost of electricity, internet, and water should be borne from the company’s funds. If you have provided mobile allowances for your employees, then consider these are reimbursable expenses, too. As much as possible, utility payments should be reimbursed expenses and included as long as these are consumed for the benefit of the company.
Advertising and marketing
Your business’s online-offline visibility is important. Through advertising and other marketing efforts, your products and services will be known to potential customers. Thus, any costs incurred for business promotion are considered a line item for a reimbursable expense.
Regardless of the advertising or promotion medium, you should cover the mark-up price of marketing which is within the original budget allotment. This may include billboard placements, pay-per-click advertisements online, and customer giveaways.
Health or medical care
Healthcare for employees is mandated by law and employees who have incurred medical expenses for hospitalization, treatments, and medicines should seek expense reimbursement.
However, small business owners should set policies for reimbursing healthcare or medical care especially if the company already provided health insurance packages.
Are Reimbursements Taxable Income?
Taxable income is a part of the company’s income statement subject to tax deductions. During tax season, companies are required to submit a tax report that includes claims for standard deductions or a list of itemized deductions which are factors in determining profit & loss.
For the Inland Revenue Authority of Singapore (IRAS), business expenses can be categorized as deductible expenses and non-deductible expenses. Based on the expense report submitted by the company for tax purposes, the IRS shall decide whether an expense claim is eligible for a tax deduction.
Small businesses and startups should know the difference between allowable and non-allowable business expenses. Allowable business expenses are expenses in which you can claim tax deductions against your revenue. Examples of allowable business expenses are advertising costs, accounting fees, running costs, and travel expenses.
Recently, the IRAS also considered work from home expenses as tax-deductible. The employee’s bills on electricity, telecommunication, and wifi charges are considered reimbursable and taxable.
Why is it Difficult to Track Employee Expenses?
Time and expenses are two important factors when managing expense claims which become an issue when wrongly handled. In general, a line item in an expense claim done manually consumes an average of 20 minutes. If these are verification and modifications, the time increases substantially.
Tracking is also one of the most tedious tasks assigned to the finance team because chasing receipts and invoices takes time. Some employees may have misplaced invoices and other supporting documents.
How to Track and Record Reimbursable Expenses
Identifying reimbursable expenses for both the employee and employers can be difficult at first. However, what’s challenging is tracking and recording these expenses to ensure the right amount of payments are made as reflected in the company’s chart of accounts. Employees who want reimbursements in their bank accounts should know which documents are required in support of the expense claims.
Employers, on the other hand, can use the best accounting software like Xero or Quickbooks to manage the recording and tracking of expense claims and payables. Good accounts management software can reduce the possibilities of errors and can help businesses reimburse and come up with a report on time.
With the use of an expense management tool, employees can upload images of their receipts in real-time. The accounting staff doesn’t need to undergo manual entry of claims details. Learning how expense management systems work, businesses can download expense reports quickly, consolidate and evaluate receipts systematically and check errors easily.
Track Employee Expense Reimbursement Using Spenmo
When employees spend their own money for business-related expenses, the company is obliged to reimburse on time. Handling expense claims and generating expense reports are complex business processes that can be efficiently done using expense management tools and platforms.
Spenmo’s virtual and physical corporate cards can help small business owners spending heavily on subscriptions and marketing. This will eliminate the entire paperwork saga. These cards can be assigned to each team member with customized budgets that are set according to their roles.
When using Spenmo’s corporate cards instead of credit cards, accounting doesn’t need to wait for a month to generate billing statements or invoices. All business expenses incurred are automatically recorded along with all the details required for submitting a tax report.
- Spenmo helps businesses avoid out-of-the-pocket expenses.
- Virtual cards allow tracking of expenses, payments made, and the remaining balance in real-time
- Employees can pay subscriptions and other business-related expenses without going through the pains of waiting for budget approvals and invoicing verifications.
- Employees can be reimbursed right away and will help prevent disappointments.
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