What are expense accounts & what is their purpose?

Expenses in accounting are the costs businesses incur to earn revenue. From rent to salaries, and marketing to maintenance, these costs can vary, but they’re part of a company's day-to-day operations.

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Understanding expenses isn’t just about knowing what your company is spending money on. It’s about ensuring these expenditures support your overall strategic goals. Tracking each expense in an expense account helps you comply with accounting standards, makes tax time more manageable, and gives you the information you need to make strategic decisions.

What is an expense account?

An expense account helps you organize and track business expenses incurred during an accounting period—usually over a month, a quarter, or a year. In double-entry accounting, debits increase expenses while credits decrease them.

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Expense accounts are temporary accounts, meaning you zero them out and close the balance to retained earnings at the start of a new accounting period. Using temporary accounts prevents business expenses from one period from being mixed with expenses in the next period.

The purpose of expense accounts in business accounting

Imagine if every time your business incurred an expense — for example, to purchase supplies, pay a utility bill, or cover travel costs — you entered the transactions into a running general ledger. At year-end, it would be tough to quickly see how much you spent on supplies, utilities, or travel without going through each entry in the ledger and totaling up each category.

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Expense accounts give you a way to organize these expenses and more easily track and manage your spending.

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Every time you spend money in your business, you record the transaction in an expense account in your accounting software. By maintaining separate accounts for different categories of business expenses, you can run reports and issue financial statements that help you analyze spending, control your budget, and run your business better.

Different types of expense accounts

Expense accounts fall into a few main categories: Cost of goods sold (COGS), operating expenses, other expenses, non-deductible expenses. 

Cost of goods sold (GOGS)

COGS includes all the direct costs associated with producing goods and services. This category can include:

• Raw materials
• Direct labor
• Products purchased for resale
• Freight costs
• Parts used in production
• Storage costs
• Overhead directly tied to a production facility

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For example, a manufacturing company includes the cost of steel used in the production of automotive parts and the wages paid to plant workers as part of COGS. Note that a service-based business might use the term cost of sales instead of cost of goods sold.

Operating expenses

Operating expenses are costs related to the day-to-day business operations. Examples of expenses that fall into the operating expenses category include:

• Rent expense
• Utilities
• Manager salaries
• Advertising expense
• Property taxes
• Accounting and legal fees
• Business travel expenses
• Office supplies
• Depreciation expenses and amortization
• Maintenance and repairs
• Insurance

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Returning to the manufacturing company example, salaries paid to the sales team, along with utility expenses for the company’s corporate headquarters, are considered operating expenses. These expenses are essential for the business's regular operations but don’t directly relate to the production of goods.

Other expenses

The other expenses category, sometimes referred to as non-operating expenses, captures infrequent or unusual expenses that aren’t related to your core operations. Other expenses might include:

• Interest expense on a loan
• A payment to settle a lawsuit
• A loss from selling a piece of equipment

These aren’t regular occurrences, but it’s important to track them to get a complete picture of your business’s financial health.

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Keeping non-operating expenses separate from operating expenses on your income statement makes it easier to see how your core business operations performed during the accounting period without being skewed by one-time events.

Non-deductible expenses

You generally won’t find non-deductible expenses on a financial statement, but it’s helpful to define them. You can’t write off non-deductible expenses on your federal income tax return. Examples of non-deductible expenses include:

• Political contributions
• Personal expenses of the small business owner or employees
• Entertainment expenses
• One-half of the cost of business meals
• Fines and penalties

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How to manage expense accounts effectively

Tracking and managing expenses helps you to monitor and control spending, generate more profit, comply with accounting and financial reporting requirements, and issue complete and accurate tax returns.

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Following these best practices and using the right tools can make managing expenses much easier and more effective.

• Stay on top of bookkeeping. It’s easy for bookkeeping to fall to the bottom of a busy business owner’s to-do list. But staying on top of bookkeeping and ensuring you categorize your expenses correctly from the outset makes tracking and analyzing financial data and managing cash flow much easier.
• Separate business and personal expenses. Open a separate business bank account and business credit card and run all business-related transactions through these accounts. This makes tracking expenses, issuing financial statements, and preparing tax returns faster and easier.
• Keep copies of all receipts. IRS rules require businesses to maintain supporting documentation for all deductible business expenses. You don’t have to keep physical copies of receipts — digital copies and e-receipts are acceptable and easier to manage with the right tools.
• Regularly reconcile accounts. Reconcile your bank and credit card accounts monthly to help detect fraud and errors in your records.
• Implement an expense approval process. Establish an approval process for expenses to prevent unauthorized spending and ensure your outlays align with your business goals.
• Train employees. Communicating and training employees on your expense policies and procedures for reimbursement helps maintain compliance and reduces the risk of errors.
• ‍Leverage technology. Expense management software that integrates with your accounting software can automate many steps in the expense tracking and categorizing process and reduce the risk of errors.

Streamline your expense accounts management with Ramp

Ramp is an expense management platform with optical character recognition (OCR) capabilities for receipt scanning, and it can revolutionize the way you handle business expenses. It allows you to:

• Snap photos of receipts to have them automatically recorded and categorized in your accounting software
• Give employees corporate cards with built-in spending policies and limits
• Loop in the right stakeholders to approve spending
• Eliminate manual data entry and reduce errors by automating routine expense reconciliations
• Access data on spending patterns for better budgeting and strategic decision-making

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If you’re ready to experience a streamlined, efficient, and transparent expense management system, request a demo or try Ramp for free today.