Expense Accounts

Expenses accounts are plans under which the companies reimburse employees for business-related expenses. The various expenses under the expense accounts includes expenses incurred for traveling, entertainment, gifts and other expenses related to the employer’s business activity. A company’s expense plan can either be accountable or non-accountable for tax purposes. The expense accounts must fulfill the requirements of the Internal Revenue Service.

The expense must be substantiated, through a receipt and in case there is an excess amount is received by the employee compared to actual expenses then it should be returned to the employer. Substantiation is a term that indicated that an employer must be able to identify the type of expense incurred and assess whether it is related to the business. If the expense account is accountable under the company’s plan the money received by the employee is excluded from the gross income. It is not treated as wages or commission and it is exempt from Withholding.

Funds that are received by the employees under non accountable plans are treated as income, subject to withholding and deductible by the employee as miscellaneous itemized deduction. The expense is a debit balance and the credit entry is passed for cash/ bank or the service provider.

Expense accounts are created to reimburse the expenses incurred by the employees for business related activities. But at times the employees take a liberty and incur unnecessary expenses which lead to added expenses for the organization. For example, an employee could have taken a bus to travel from one place to another, but he instead takes a cab, leading to added expenses. Other expenses include writing off huge bills for a vacation in the name of a business trip and having exquisite dinners at a 5-star restaurant.

Questions:

• What are expense accounts?
• What are disadvantages of creating expense accounts for the company?