Expense report importance can be felt company-wide. Expense reports are valuable pieces of data that allow companies to track spending per department or project, reimburse employees for out-of-pocket expenses and calculate profits after deducting expenses. But creating a process to track expenses is just as important as the reports themselves.
What is an Expense Report?
In its basic definition, according to Accounting Tools, an expense report is a type of form used to track how money is spent for the business. The form is commonly used by employees who pay for their own business expenses, e.g., travel, food, supplies, etc. An expense report itemizes those expenditures eligible for reimbursement. Receipts are typically also attached to the form. Many companies use an expense report template to simplify the process for employees and ensure accuracy.
The second part of the process is approving the expenses that have been tracked, reimbursing employees for the amounts requested. Because documentation exists of the expense, the employer can then record the reimbursed amounts as a business expense, which factors into the amount of accounting profit and taxable profit recognized.
What are Expense Reports Used For?
When considering expense report importance, reimbursing employees is the first thing that comes to mind. Employees have used their own money to do their job so paying them what they’re owed must be top of the list. Employee expenses can include running for extra supplies while on a job, taking a star employee to lunch or filling a company truck with gas.
Understanding How Much You’re Spending
Expense tracking also lets companies track spending to determine budgets and available cash flow. Business News Daily offers all types of examples of tracing expenses for different areas of your business. For example:
- Employee wages and benefit expenses
- Office expenses for supplies and equipment
- Repairs and maintenance for fixing equipment
- Work vehicle expenses like gas, insurance and maintenance
- Marketing and advertising
- Taxes and license fees
Tracking all of these expenses gives companies an idea of how much cash they need to get work done today and tomorrow. Looking at the data described above, companies will know exactly how much they need to spend on updating licenses every year. How much they spend on gas and how much that amount will go up if they add another truck. And, how they can save money. For example, if repairing your current equipment is a huge expense, you may save money buying new.
Maintaining IRS Deduction Compliance
Expense reports are also used for tax preparation. According to the IRS, a deductible business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business, like gas, materials or meals. A necessary expense is one that is helpful and appropriate for your trade or business, like advertising or contract labor. An expense does not have to be indispensable to be considered necessary. During tax preparation, companies use IRS forms to list their applicable deductions. Expense report compliance comes down to making sure you can prove the expenses you claim are appropriate deductions.
Read more about the different IRS expense report categories here.
Types of Expense Management
There are essentially three ways to track expenses: paper, spreadsheets or expense management software.
Paper tracking: Managing expenses on paper consists of collecting paper receipts, attaching them to paper expense reports and submitting to accounting. Once approved, the expenses are reimbursed either monthly or quarterly and the paper expense report is filed into a cabinet. Here’s the problem with paper tracking, there are multiple steps along the process that are prone to error. Tracking paper receipts is not only tedious but unreliable. Paper can easily get lost and some receipts, like gas receipts, can become illegible if stored for a month for longer. Let’s not forget that your accounting person has to go through each of the submitted paper receipts, which is time-consuming and lead to errors.
Spreadsheets: Using an Excel or Google Sheets spreadsheet is a step up from tracking expenses on paper. What’s more, using this method allows companies to use an expense report template, like this one by Microsoft, which is a time saver. Tracking expenses on a spreadsheet is done by plugging in data according to the assigned cell. For example, columns can be designated by: Data, Amount, Description, Hotel, Travel, Fuel, Meals and Entertainment. Expense report templates for spreadsheets have built-in formulas that automatically total the amounts. Spreadsheets are easy-to-use and inexpensive, Google Sheets is free, and can help eliminate your reliance on paper. But relying on spreadsheets for expense tracking still has some concerns. Spreadsheets aren’t secure for one and all that data must be manually inputted, which means errors. Years ago studies found that nearly 90% of spreadsheets contain errors, that number can’t have improved over the years (humans haven’t changed that much). This is likely due to the fact that spreadsheets can be overwritten, which also opens companies up to fraud.
HR Management Software: Where there is a problem doing business, there’s likely a software solution. HR management software takes your data and securely inputs into systems that automate the entire expense management process, like accounting software. Security features only give access to certain employees, eliminating risk.
Arcoro’s HR Software gives companies the ability to manage their talent in multiple areas including benefits, payroll and compensation. With built-in integrations, like to 40-plus payroll systems, data is synced in real-time between our HR and your payroll software. HR administrators can configure the features, content available and access based on company priorities and other internal rules concerning which expenses you’ll reimburse. An employee portal allows your employee to automatically submit expenses so you can focus on more meaningful projects, rather than playing detective to track down expense reports and receipts.