What is an expense report?

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If your employees frequently make purchases on behalf of your business, you need to have a way to handle expense reimbursement. Even if your employees are using corporate cards or preapproved stipends to make purchases, you need to be able to track these expenses to know how and where your business is spending money.

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That’s where expense reports come in. Below, we take a closer look at what expense reports are, including how to create them and what information they should contain. We also explain why they’re so important for businesses and highlight some key reporting mistakes to avoid.

What is an expense report?‍

An expense report is a document that lists any business expenses incurred on behalf of the company within a given reporting period, whether those expenses were paid for with an employee’s own money, a corporate card, or another source of company funding.

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Expense reports help you track business spending across different expense categories, monitor budgets, and manage out-of-pocket expenses. They also provide the necessary documentation for claiming business tax deductions, which is essential in the event of an audit.

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Most businesses require employees to submit expense reports on a weekly, monthly, or quarterly basis. For employees who incur business expenses more sporadically, expense reports are more likely to be a one-off occurrence whenever necessary.

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Expense reports allow companies to review the expenditures employees incur on their behalf, verify that they’re accurate and in line with their expense policy, and reimburse team members for these purchases as necessary.

Who prepares an expense report?

Employees are responsible for filling out expense reports and submitting them for approval. They collect expense receipts and document each purchase to provide a detailed account for reimbursement. Employees then submit their reports to their manager or the finance team for approval, ensuring compliance with the company's expense policies and budget constraints.

What’s the difference between an expense report and an invoice?

Invoices and expense reports are sometimes mistaken for one another, but they have different business functions. The primary differences between an invoice and an expense report lie in their purpose and who creates them.

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An invoice is a request for payment issued by a seller to a buyer for goods or services provided. When a business purchases office supplies from a supplier, for example, the supplier must submit an invoice to be paid.

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An expense report, on the other hand, is a document prepared by an employee to detail and seek reimbursement for expenses incurred on behalf of the company. If an employee purchases office supplies directly from a store, the employee must submit an expense report to record these expenses and initiate reimbursement if they paid out of pocket.

The expense reporting process in a nutshell

Expense reporting is the term used to describe the overall process of filling out an expense report and submitting it for approval. It begins when the employee creates and submits their expense report, moves along through the review and approval process, and ends when the expenses are approved and the employee receives any necessary reimbursements.

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The process of creating and submitting an expense report is surprisingly consistent from business to business, even within different industries. The exact steps and the people involved may vary depending on a company’s policy, but the process typically looks something like this:

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1. The employee incurs an expense: For an expense report to be necessary, an employee must first make a purchase on behalf of the business. The employee should be sure to collect any receipts or documentation related to the expense.
2. The employee prepares an expense report: At the end of the reporting period, the employee generates an expense report according to the process outlined in the business’s expense policy.
3. The employee submits the report: Once the employee has completed their report, they submit it for review. As part of the submission process, employees must include any receipts or documentation related to the purchases in the report.
4. The report undergoes review: After the employee submits the expense report, it must be reviewed to ensure that it’s accurate, typically by the employee’s manager. The manager ensures the purchases comply with company policy, and that each expense is valid and associated with the right account.
5. The report is approved or rejected: If the employee’s manager accepts the report, they approve it and forward it to the finance department, where it’s officially processed and recorded. If the report is rejected, it typically gets returned to the employee to resolve any errors or discrepancies.
6. The company reimburses the employee: If necessary, the finance department will initiate reimbursement to the employee, typically via check or direct deposit (ACH).

What information should be included in an expense report?

There’s no one “right” way of organizing the information in an expense report. What’s important is ensuring your expense reports contain all the essential information.

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In addition to the submitter’s information (the name, contact information, and department of the employee submitting the report), an expense report should also include the following information about each purchase or expense:

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• Purchase cost: How much did each purchase cost, including any taxes and fees? 
• Purchase date: When was the expense incurred? This should match the date on the receipt submitted as part of the expense report.
• Purchase description: What was purchased, and what was the business purpose of the expense?
• Expense category: What business expense category does each purchase fall under?
• Seller: Who was the retailer, vendor, or supplier associated with each purchase?
• Account: Which account should the expense be charged to? The account can be tied to a department, client, project, event, etc.
• Subtotal by category: What was the total cost in each expense category?
• Grand total: How much was spent in total over the course of the reporting period (day, week, month, etc.)?

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Again, employees must submit receipts or other documentation for each purchase included in their expense reports. This is especially important if you plan to write off deductible expenses on your tax returns: The IRS requires you to retain receipts for business expenses for at least seven years in the event that your company gets audited.

What expenses go on an expense report?

An expense report can include any legitimate business expense. Here are some examples of expenses that can go on an expense report:

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• Travel expenses incurred on a business trip
• Meal and entertainment expenses
• Office supplies and equipment
• Utilities and rent
• Professional services
• Software subscriptions
• Telecommunications
• Insurance
• Training and education
• Marketing and advertising
• Maintenance and repairs
• Other miscellaneous expenses

How to fill out an expense report

At the end of the day, it’s not hard to create expense reports—but it’s a lot easier once you know the steps involved. To create an expense report, you’ll need to:

1. Choose a template

Most businesses will provide their employees with an expense report template to fill out. Different templates may be used for different types of expense reports—for example, one-time, quarterly, or departmental expense reports—so it’s important to make sure you’re using the one that fits your needs.

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If your business doesn’t have a template for expense reports, you can download Ramp’s free, easy-to-use expense report template for both Google Sheets and Microsoft Excel.

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Of course, manually creating expense reports can quickly become tedious. That’s why many businesses opt to use expense reporting software to automate the process instead. These expense management platforms can track employee spending and automatically generate reports at the end of the reporting period.

2. Itemize your expenses

Once you choose a template, you can start filling it out. First and foremost, you’ll need to itemize your expenses by splitting out each purchase line by line. As noted above, this should include a description of the item, the cost, the date of purchase, the name of the retailer, and a brief description of the business purpose. Depending on the template you chose, you might group purchases into expense categories (business travel, supplies, etc.).

3. Provide receipts

You must submit supporting documentation for each purchase included in your expense report. Depending on your company’s expense policy, these can be paper receipts, digital scans, or electronic receipts. In the absence of a receipt, your company may reject the report or require another proof of purchase, such as an invoice, canceled check, or credit card statement.

4. Total the cost

Before submitting the report, you’ll need to calculate the total of all your itemized expenses. If the template you’re using requires you to break out costs into different categories—which many do—you’ll first sum the subtotal for each expense category. Then, you’ll add all the subtotals to find the total amount for your expense report.

5. Submit the report

Finally, you’ll need to submit the report and route it for approval to receive reimbursement. Depending on your company policy, you may be expected to either print the report and provide it to your manager, email the report to the person responsible for approvals, or else submit the report via expense management software. If you’re unsure of the specific process for submitting your expense report, you should review your company’s expense policy.

Are expense reports necessary?

Even if you as a small business owner are the only one making purchases on behalf of your company, it’s still important to have an expense reporting process. Expense reports are necessary because they:

Provide transparency 

A properly submitted expense report includes important information about each expense. Having insight into this information makes it easier to plan and budget for future expenses, identify areas to potentially cut back on spending, and simply stay organized and manage your cash flow.

Facilitate employee reimbursements

If your employees make business purchases with their own money, the fair thing to do is reimburse them for those expenses. In fact, reimbursements might even be required by law. Under the Fair Labor Standards Act (FLSA), employers must reimburse employee business expenses if those expenses drop the employee’s pay below the federal minimum wage.

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Additionally, several states—and even some municipalities—have laws requiring reimbursement under a variety of circumstances. Employee expense reports make it easier to track expenses and ensure that you reimburse them according to the letter of the law.

Support your business tax deductions

If you plan on deducting business expenses come tax time, it’s important to have a clear record of all your expenses. This includes knowing which expenses are deductible and which are non-deductible. It also includes collecting and organizing documentation (i.e., receipts) for each purchase in the event that the IRS ever audits your business. Expense reports fulfill all of these requirements.

3 common expense report mistakes to avoid

Given how important expense reporting is for your business, it’s important to avoid these common mistakes:

1. Not having a clear expense policy

If your business doesn’t have a comprehensive expense policy that employees can reference, creating one should be your top priority. This one act can have a big impact on the number of errors you see submitted in expense reports and can eliminate the time wasted updating reports and fixing mistakes.

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Your expense policy should explain who is allowed to make business purchases and what spending limits or expense category restrictions exist. It should also outline the approval process, indicate the documentation that must be submitted with each expense, define your expense reimbursement policy, and ideally provide a template or form for employees to follow. 

2. Accepting expense reports without supporting documentation 

If you accept an expense report without a receipt or similar documentation, you open your business up to significant risk. This is especially true if you plan to claim tax deductions on business expenses. If your business is audited by the IRS and you don’t have documentation to support each expense, you could face hefty fines and penalties.

3. Miscategorizing expenses

To get a clear sense of how your business is spending money, you need to accurately categorize your expenses. Doing so gives you a more granular understanding of spending and makes real-time reporting much easier. It also makes it easier to claim any deductions come tax season. With this in mind, it’s important to review each expense to ensure that it’s properly categorized before you approve it.

Streamline expense reporting with Ramp

Despite their widespread use, manual expense reports can be time-consuming and demanding to fill out, track, and review. But it doesn’t have to be that way.

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Ramp’s expense management platform can instantly increase your team’s productivity. Our modern finance platform features automated expense reporting and approval workflows, spend controls, integrations with popular bookkeeping and accounting software, and a handy mobile app for capturing receipts on the go.

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Unlimited physical and virtual business cards take the burden off your employees to pay out of pocket for business expenses and all but eliminate the need for reimbursements. Automatically enforce your expense policy, categorize expenses, and save your whole team time with Ramp.