When employees pay for business expenses out of pocket, you can use an expense report to document the cost come tax time and to manage reimbursements. However, tracking these expenses also empowers business owners and department managers to remain cognizant about how much they’re spending in general.
The ins and outs of expense reporting
Creating expense reports enables businesses to track spending over time and categorize expenses for tax filing, auditing, and budgeting purposes.
There are several different use cases for expense reporting. If you’re running a business or are in charge of handling your department’s finances, you need to know what those are and how to generate an itemized expense report efficiently.
You might list expenses as an entire category in your business budgets, but you’ll also want to use expense reporting to keep your finances in order. So, what is an expense report exactly? There are two ways to understand this significant business priority.
First off, an expense report is a document that lists specific business expenses and the details related to each one, such as the amount and the purpose—whether that’s a payout or purchase.
As a business activity, expense reporting helps track the costs of different departments, manage out-of-pocket expenses, such as office supplies or a business trip, and monitor different expense categories.
Tracking expenses gives you clarity over where your money is going. You can also use expense reports to ensure you’re accurately reimbursing employees and to organize your tax-deductible business expenses to prepare for tax season.
You might include three types of business expenses in your expense reporting:
- Fixed: Fixed expenses remain the same and don’t typically change. Examples are debt payments, lease payments, insurance, and subscriptions.
- Variable: Variable expenses differ each month. Examples include packaging, advertising, utilities, and hourly labor.
- Periodic: Periodic expenses might occur quarterly or annually, such as payments to an external accounting firm for tax filing. Periodic expenses may also be unforeseen or expected, like emergency repairs, or could include annual bonuses.
To track money going in and out, business entities might generate expense reports monthly, quarterly, annually, or anytime between. Expense reports impact the financial statements by subtracting from the business’s revenue and reducing your profit reported on the income statement for that fiscal period. However, expense reports are not financial reports or statements and they don’t show up in a company’s filings.
What an expense report is used for
You can use expense reporting to track business spending, both company-wide and by department.
Moreover, an expense report helps business owners:
- Understand where money is going
- Organize work expenses by department
- Reimburse employees for expenses they paid for with their own money
- File a business tax return with ease
- Prepare for any future business audits with receipts appended
Common business expense report templates
While there are many different types of expense reports, almost all require the same basic set of information to make tracking, organizing, and filing as seamless as possible.
Consider the travel-related expense report below. This document makes it easy to break down all the costs involved.
Here are some of the fundamentals you might include in your expense reports for reimbursements:
- Company information. This includes the employee name, the manager name, the employee ID number (if applicable), and the name of the department where the expense occurred.
- Timeline and dates. The expense report needs to have the date on which an expenditure occurred (so it should match the date on the attached receipt if there is one). There will also be the date that the expense report is completed and submitted.
- Purpose of the expenditure. Whether it’s employee reimbursement or a run-of-the-mill insurance payment, the expense report needs to include the nature of the expense as well as the description.
- Cost of the expenditure. A separate column will display the cost of all the expenses and total them at the bottom.
- Category or department of the expense. Depending on how the business operates, the expense report might require a specific account that the payment is charged to or state the expense category. Smaller companies may organize by category since they may not have separate departments.
- Payment information. This section asks how (what check number, credit card, or account?) and when (the date) someone made the expense.
- Signature. No matter who submits an expense report, a certified signer’s final signature verifies that they have reviewed the report.
What an expense report should include
In the world of expense reporting, there are several templates you can choose from to record and itemize your business’s expenses properly.
Of course, the type of template you should work with will depend on the type of expenses you’re tracking. For example, agencies and consultants will use expense reports to track expenses with a specific client. In contrast, sales representatives may use them to get reimbursed for travel and accommodation costs.
While there is an expense report form for almost any occasion, the most common three are one-time, recurring, and long-term expense reports.
A one-time expense is a non-recurring cost that happens infrequently. It could be regarded as a type of variable expense.
These forms are commonly used when employees make out-of-pocket business expenses. One-time ordinary expenditures include:
- Relocation costs
- Event costs
- Meal/accommodation/travel costs
- Sale of an asset
As shown above, one-time expense reports are short and straightforward. All you need is the expense, pay period, description, and a signature signing off on the total cost.
A recurring expense is a type of ongoing cost. These expenses commonly appear in an annual, quarterly, or monthly expense report. However, recurring expenses are standard costs that you expect, such as:
- Administrative costs
A recurring expense report form allows an employee or manager to document various expenses line by line. Every item that is regularly itemized (that is, any recurring item) should have its own column on this type of report.
A long-term expense occurs on occasion. It could be considered a type of periodic expense. Some standard long-term costs are:
- Occasional trips
- Holiday gifts or bonuses
A long-term expense report is helpful because it allows account managers to get an idea of the kind of spending associated with a specific part of the business over time.
When comparing long-term expense reports to other templates, you’ll see that each month gets its row, and then monthly totals must be calculated for each expense category.
Business expense categories
One of the key benefits of expense reporting is expense categorization. Using different expense categories helps to organize your expense tracking. This, in turn, makes business accounting more efficient and reduces the risk of accounting errors.
When creating your business expenses categories, you’ll want to separate tax-deductible and non-deductible expenses. Most of your business spending is deductible because you’re using it to run your business. However, some costs, such as commuting expenses and gifts over a certain amount, aren’t deductible.
You can then create more granular categories for the different types of deductible business expenses, such as employee pay, marketing costs, and rent and utilities. Distinguishing between what the IRS recognizes as tax-deductible and non-deductible expenses and breaking down the different categories will help immensely when you file your business taxes.
How to create an expense report
Preparing and submitting an expense report is easy—you simply need to ensure your numbers are accurate by tracking expenses and attaching necessary receipts.
Once completed, a manager will submit the expense report to the higher-ups or the finance department. Some businesses let approved employees submit a report as long as it’s been verified and endorsed by a manager.
Here’s a quick step-by-step process for filling out an expense report:
#1: Choose an expense report template
Based on the timeline of expenses you’re going to report, choose a relevant report template.
So, for example, if one of your employees needs reimbursement for a sales trip, you would use a one-time expense report. (Unless your employees do travel a lot—then a recurring expense report with rows for each month or quarter might be better.)
Follow the information on your template by filling out all necessary details, like the date, company, employee name, and whatever else the top part of the report may ask for.
Repeatedly filling out expense reports can get tedious, which is why many small businesses ditch the free templates that are available online. Instead, you can choose automated expense reporting software that fills in all of your company’s information and provides customized templates that match your exact needs.
#2: Add your itemized expenses
In the itemized section, list all of the relevant expenses that meet the criteria of your expense report. Employees who travel for work might include gas mileage, hotels, and meals on their expense report.
Employees that need to get reimbursed should include receipts for all purchases but especially under these conditions:
- If the expense is over $75 and the nature of the expense is not apparent on the electronic receipt.
- For lodging invoices where the credit card company does not provide the merchant’s electronic itemization of each expense.
- If an employee pays for an expense without using the business credit card.
Expenses should be placed in chronological order so that the most recent transaction is the last line.
#3: Add up the total
When you’ve listed all of your business expenses incurred, add the amount of each expense to generate a single total.
If you’re listing different categories—such as a recurring expense report that has rent, utilities, and salaries—then you’ll add together the grand total of all the expenses from each category. This final number tells you your business costs in that department or for a particular time period.
As an expense management activity, this final number can also help inform your budget, which is itself a road map you create for your business. Expense tracking and reporting allow you to observe your budget in action.
Get expense reporting software for your business
The most complicated thing about expense reports is finding the right template for the type of expenses you want to itemize. But using an expense reporting solution customized to your business’s needs takes away any potential for second-guessing.
Expense management software can help you keep track of employee spending and review transactions in real-time, so nothing is ever a surprise. And, you’ll never have to spend valuable time worrying if your expense reports are in order. Learn how Divvy can help you save hours every month on expense management.
The information provided on this page does not, and is not intended to constitute legal or financial advice and is for general informational purposes only. The content is provided “as-is”; no representations are made that the content is error free.