What are expense accounts? Definition and types

Expenses in accounting are the costs businesses incur to earn revenue. These costs can vary from rent to salary, marketing to maintenance, but they’re part of every company's day-to-day operations.

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But understanding expenses isn’t just about knowing what your company spends money on; it’s about ensuring your expenditures support your overall strategic goals. Tracking each expense in an expense account helps you comply with accounting standards, makes tax prep more manageable, and gives you the information you need to make the right decisions.

What is an expense account?

An expense account is a record of your business costs during a given accounting period, usually over a month, a quarter, or a year. Expense accounts help you accurately track your day-to-day expenses by organizing them into different categories.

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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. In double-entry accounting, debits increase expenses while credits decrease them. Using temporary accounts prevents business expenses from one period from being mixed with expenses in the next period.

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You track your expense accounts on your company’s income statement, sometimes called your profit and loss (P&L) statement.

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 expenses—you entered the transactions into a running general ledger.

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

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Every time your business spends money, 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 (OpEx), other expenses, and non-deductible expenses.

Cost of goods sold (GOGS)

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

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• 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 would include the cost of steel used to produce 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 (OpEx)

Operating expenses are the costs you incur to keep your business running. Examples of expenses that fall into the OpEx category include:

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• Rent expenses
• Utilities
• Manager salaries
• Advertising expenses
• 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:

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• Interest expenses on a loan
• A payment made as part of a lawsuit settlement
• A loss from selling a piece of equipment

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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 returns. Examples of non-deductible expenses include:

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• Political contributions
• Personal expenses of the small business owner or employees
• Entertainment expenses
• 50% of the cost of business meals
• Fines and penalties

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 easier and more effective:

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• 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 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. They don’t necessarily need to be physical 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 account management with Ramp

Ramp is an expense management platform with optical character recognition (OCR) capabilities for receipt scanning. Ramp’s modern finance tools can revolutionize the way you handle business expenses by allowing you to:

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• Snap photos of receipts to have them automatically recorded and categorized in your accounting software
• Give employees corporate cards with built-in expense policies and spend limits
• Automatically 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 more streamlined, efficient, and transparent expense management system, try an interactive demo.