What is an expense account? Definition, examples, and types

Expense accounts are how businesses track and organize the costs they incur to earn revenue. These include everything from rent and salaries to marketing and maintenance, which are essential expenses that keep your operations running.

Understanding expense accounts isn’t just about recording what your company spends. It’s about making sure your spending supports broader financial goals. Tracking each expense through the right account helps you comply with accounting standards, simplify tax prep, and make smarter financial decisions.

What is an expense account?

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

Expense accounts are temporary accounts. At the start of a new period, you zero them out and close the balance to retained earnings. In double-entry accounting, debits increase expenses and credits decrease them. This prevents expenses from one period from being mixed with the next.

Expense accounts are part of your chart of accounts alongside assets, liabilities, equity, and revenue. You report them on the income statement, also called the profit and loss (P&L) statement.

How expense accounts work

In double-entry bookkeeping, expenses go up with debits and down with credits. When you record a business expense, you typically debit the specific expense account and credit either cash or accounts payable, depending on whether you paid it immediately or owe it.

For example, if you pay a $200 utility bill, you would record:

• Debit: Utilities expense $200
• Credit: Cash $200

This increases utilities expense on the income statement and reduces cash on the balance sheet. At period end, accumulated expense entries are closed to retained earnings.

Expense accounts vs. asset accounts

Expense accounts and asset accounts serve different purposes:

• Expense accounts track costs that are fully used up within the current period, such as rent, utilities, salaries, or office supplies
• Asset accounts represent resources that provide future economic benefits, such as equipment, vehicles, or multi-year software licenses

Large purchases that benefit multiple periods should be recorded as capital assets, not expenses. Misclassifying them can distort financial statements and reduce reported profits.

Why are expense accounts important?

Imagine if every time your business incurs an expense, such as purchasing supplies, paying a utility bill, or covering business travel expenses, you enter it into a running general ledger. At year-end, it would be tough to see totals by category without combing through each entry. Expense accounts organize spend by category and period so you can track costs at a glance and keep them under control.

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, you can run reports and issue financial statements that help you analyze spending, stay on budget, and make better decisions.

Types of expense accounts

Expense accounts generally fall into a few main categories: operating expenses (OpEx), cost of goods sold (COGS), and non-operating expenses. Some businesses also track non-deductible expenses for tax purposes. The structure of your expense accounts depends on your industry and reporting needs.

Cost of goods sold (COGS)

COGS includes the direct costs of producing goods and services. These expenses tie directly to revenue and determine gross profit. Examples include:

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

For example, if you run a manufacturing company, the cost of steel used to produce parts and wages paid to plant workers fall under COGS. Service businesses may refer to this as “cost of sales.”

Operating expenses (OpEx)

Operating expenses are the costs your business incurs to keep daily operations running. They don’t directly produce goods or services but are essential for maintaining business activities. Common operating expenses include:

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

On the income statement, OpEx appears below revenue and COGS and helps calculate operating income (or operating profit).

Non-operating expenses

Non-operating expenses capture infrequent or unusual costs not tied to core operations. They appear below operating income on the income statement, separating day-to-day results from one-off events such as:

• Interest expenses on a loan
• Payments from a lawsuit settlement
• Losses from selling equipment

Tracking non-operating expenses separately shows how core operations perform without distortion from irregular events

Non-deductible expenses

Non-deductible expenses can’t be written off on federal tax returns. Common examples include:

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

Keeping a record of non-deductible expenses helps ensure accurate tax reporting and prevents mistaken write-offs.

Common business expense account categories

Every business tracks expenses differently, but most use similar categories to keep financial reporting consistent and easy to interpret. Grouping expenses this way helps you see where money is going and spot opportunities for cost control or optimization.

Setting up and managing expense accounts

A consistent expense account structure makes it easier to record, categorize, and analyze your spending. A clear setup helps you keep reports organized and draw insights from the data over time.

Creating your chart of accounts

Your chart of accounts is the foundation of your bookkeeping system. It lists every account your business uses to track money in and out. To set it up effectively:

• Start broad, then get specific: Begin with main categories like revenue, expenses, assets, and liabilities, then add subaccounts for more detail
• Use a logical numbering system: Many businesses assign number ranges, such as 6000–6999 for expenses, to make reports easier to read
• Keep names simple and consistent: Use clear, descriptive account names and apply the same format across departments to standardize reporting

Here’s an example of how a small portion of your chart of accounts might look:

Expense account coding best practices

Account codes help you organize and search transactions quickly in your accounting software. To create a useful coding system:

• Assign codes consistently: Choose a pattern (for example, 6100 for rent or 6200 for utilities) and apply it throughout your system
• Use subcategories for better insights: You might divide “Travel” into airfare, lodging, and meals subaccounts
• Balance detail with simplicity: Include enough categories to identify spending patterns, but not so many that reports become hard to interpret

Expense management best practices

Tracking and managing expenses gives you visibility into where your money goes and helps ensure compliance with accounting and tax rules. Following these best practices makes expense management easier and more effective:

• Stay on top of bookkeeping: Categorizing expenses correctly from the start makes tracking financial data and managing cash flow far easier
• Separate business and personal expenses: Open a business bank account and business credit card, and route all business-related transactions through them. This simplifies reporting and tax preparation.
• Keep copies of all receipts: The IRS requires documentation for all deductible business expenses. Digital copies and e-receipts are acceptable and easier to manage.
• Reconcile accounts regularly: Reconcile bank and credit card accounts monthly to detect fraud or recording errors
• Implement an approval process: Set clear approval steps for expenses to prevent unauthorized spending and ensure all costs align with your goals
• Train employees: Make sure your team understands expense policies and reimbursement procedures to maintain compliance and reduce mistakes

Automation tools can handle many of these tasks for you, reducing errors, enforcing policies, and keeping expense data organized in real time.

Tax implications of expense accounts

How you categorize expenses affects your financial reports and what you can deduct at tax time. Accurately tracking and labeling each expense helps you claim every eligible deduction, stay compliant with IRS rules, and avoid problems during an audit.

Deductible vs. non-deductible expenses

Most ordinary and necessary business costs are tax-deductible. That includes rent, utilities, employee wages, insurance, and office supplies.

Not every business cost qualifies, though. Expenses such as political contributions, personal purchases, fines, and certain entertainment or meal costs can’t be deducted.

Some expenses fall into gray areas—for example, if a purchase serves both personal and business purposes, such as a phone or vehicle. In those cases, you can usually deduct only the portion used for business.

Record-keeping for tax purposes

Solid record-keeping is your best defense in an IRS inquiry. The IRS requires receipts, invoices, and other documentation for deductible expenses. Digital records are acceptable and often easier to maintain.

Keep records for at least three years, but some documents—like property or payroll records—should be stored longer.

Regularly reviewing and organizing these records keeps you compliant and makes tax season far less stressful.

Streamline your expense account management with Ramp

Accurately tracking and categorizing expenses is essential for maintaining reliable financial records, but manually managing expense accounts can be time-consuming and error-prone.

Ramp’s expense management software includes optical character recognition (OCR) capabilities for receipt scanning. Our modern finance tools can revolutionize the way you handle business expenses, allowing you to:

• Snap photos of receipts to have them automatically recorded and categorized in your accounting software
• Give employees business credit 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

Want to learn more? Explore an interactive demo.