Mastering expense accounts: streamline your business finances

Key takeaways

• Expense accounts are a running tally of your business’s day-to-day operating costs within a specific period of time.

• Effective management of expense accounts has many benefits for businesses, including more accurate reporting and analysis, a better understanding of business performance, and easier preparation for tax time.

• Adopting a digital expense management solution is the best way forward for businesses focused on growth, as these platforms streamline approval workflows, give real-time spend visibility, help to manage risk, and eliminate manual data entry.

What is an expense account?

An expense account is a financial record of the money your company spends on day-to-day operational costs within a specific period (usually monthly, quarterly or yearly). Think of it as a running tally or record of how much your business has to spend to operate. At the end of each accounting period, the funds held within expense accounts are transferred to other accounts, such as those for retained earnings (or similar). This resets the expense accounts to zero so businesses have a fresh slate for the new accounting period.

Your company’s income statement (also known as a profit and loss, or P&L statement) will show your expense records, which then feed into your financial reports, showing how profitable (or unprofitable) your business has been over the accounting period.

The purpose of expense accounts is to help you accurately track and manage your day-to-day expenses by recording costs and sorting them into different categories, as well as ensuring each accounting period ends with balanced accounts.

Why you need expense accounts in business accounting

Expense accounts give you a straightforward and reliable overall view of your day-to-day operations expenses. Well-maintained expense accounts enable you to make smarter and more strategic financial decisions, including better managing your future planning and regulatory compliance.

Let’s look at some other reasons expense accounts are a vital pillar of business accounting success.

🟠 Better and more reliable financial reporting and analysis

When it comes to ensuring your business’s financial reports are accurate, expense accounts play a key role. They give a clear picture of exactly where your business’s money is being spent, simplifying the process of producing reliable financial statements. Having this information to-hand also helps with calculating burn rate (how quickly your business is spending – or burning through – its cash). Proper expense account management is also essential ‌when your stakeholders, such as investors and lenders, need to be provided with accurate business data quickly.

🟠 Better understanding of business performance = more informed decision-making

The different categories that expense accounts are organised into (which we’ve talked about in the next section of this article) can help you better understand where exactly your business is spending money, and turn this knowledge into potential cost savings or other growth-focused changes. They also make it easier to draw strategic insights into your business’s spending habits, with many expense management platforms offering time-saving automated reporting features.

🟠 Easier tax preparation

Keeping a strong handle on expense account tracking makes life significantly easier when it comes to tax time, as maintaining an organised record of your deductible expenses will help you simplify reconciliation, stay compliant with tax laws, and even potentially reduce your tax liability. Using a digital platform to keep track of your expenses also increases your control over internal spending, and reduces the risk of inaccurate data entry caused by human error.

Different types of expense accounts

Expense accounts fall into a few different categories; Cost of Goods Sold (COGS), Operating Expenses (OPEX) and miscellaneous other expenses.

Cost of Goods Sold (COGS)

The Cost of Goods Sold (COGS) expense account category includes all the costs associated with producing the goods and/or services your business sells to your customers. Another name for this category is Cost of Sales, and tracking it gives you vital insights into whether you’re pricing your products accurately, as well as other key financial metrics. Calculating cost of sales can be tricky, however it’s an important figure for businesses to know.

COGS expense account items can include:

• Raw materials used in creating products or offering services

• Inventory and merchandise

• Labour costs such as salaries or wages when used to create products or execute services

• Storage costs

• Production machinery costs

• Freight costs

For example, COGS for a business manufacturing clothes could include the costs for the material used to make the clothes and the costs of the human labour needed to design and produce the clothes. However, it would not include the cost of transporting the clothing to sellers, or the cost of the labour needed to sell the clothes in stores, as these aren’t costs related to the production of the items.

Operating Expenses (OPEX)

The OPEX expense account category includes the costs involved in keeping your business operating day-to-day, but not with producing the goods or services you sell. These could include:

• Rent and utilities expenses

• Marketing expenses

• Insurance costs

• Payroll for staff outside of direct goods production or service provision, for example, management and office staff

• Certain taxes, such as property tax and employee payroll taxes

• Equipment maintenance costs

• Office supplies and technology

• Legal and accounting fees

To continue the clothing manufacturer example, salaries paid to store staff, the costs of renting the stores, the costs of marketing the products, and insurance costs would be considered operating expenses. These are essential costs for running the clothing business successfully, however they don’t relate to actually producing the goods.

Other expenses

Other expenses can sometimes be referred to as ‘non-operating expenses’, and can include unusual or one-off expenses that don’t relate to your business’s core operations. These could include:

• Loan interest

• Depreciation loss from selling equipment

• Payments made as part of lawsuits

• Taxes such as income tax

Keeping track of these ‘other expenses’ can help you gain a total picture of your business’s financial health, however you should make a point to track them separately from your regular operating expenses. This will ensure your performance during that particular accounting period isn’t skewed by any miscellaneous one-off costs that won’t come around regularly.

Challenges in managing expense accounts

Trying to effectively manage expense accounts can come with challenges for business owners, especially those who are in growth and scaling phases. Let’s cover a few of the most common expense account management issues.

🟠 Time-wasting manual processes

Imagine this. It’s 4pm on a Wednesday, and your team’s deadline for submitting the expenses for the end of this accounting period is 5pm on Friday. The problem is, you’re still using manual processes for your expense accounts, leaving your team with roughly 20 hours ahead of looking through Excel spreadsheets, chasing colleagues up for their expenses, uploading data to your accounting system, running through budgets, and writing financial reports. Manual processes can cause an expense management nightmare, as well as being cost-ineffective and unsustainable – particularly when your company is trying to grow and scale its operations.

🟠 Lack of cost control

Using thoughtful cost management strategies is the key to keeping your expense accounts under control and experiencing the benefits that come with this. Using manual systems (as opposed to digital expense accounting) can make it difficult to keep expenses in line with both company spending policies and external regulations. For example, you could have a situation where a staff member is repeatedly exceeding their spending limit. Digitising expense management and putting spend controls in place before spend happens is a great way to get on top of this.

🟠 Limited transparency and insights

In order to stay ahead of the competition, you need to have quick access to your data and full oversight over your cash position. A lack of visibility into who is spending what (and where they’re spending it) can also leave your business vulnerable to unnecessary costs, and reliance only on end-of-month expense reports exacerbates this.

Reimbursement of out-of-pocket expenses, when not tracked in real time, can cause headaches end-of-month. For example, traditional bank cards often come with delays in spend visibility, making it difficult to spot (and act to prevent) fraudulent or out-of-policy spending. Your best option here is to issue corporate cards to employees where spend controls can be put in place before spend happens, giving you real-time visibility and supporting easy reconciliation.

🟠 Disconnected systems and tools

Disjointed systems and tools can also really hold your business back, with a complex web of tools resulting in a fragmented financial ecosystem that’s frustrating to use. Using an end-to-end financial solution for your expense accounts makes it easier to access valuable insights, as well as reducing the chance of human errors and workflow stagnation.

How to manage expense accounts

Although managing expense accounts can be tricky, by following some best practices and using the right expense management software, it doesn’t have to be something your team dreads at the end of each financial period.

• Choose the right expense tracking method: A digital expense management platform offers real-time tracking, customisable categories, and mobile access, making it superior to manual or spreadsheet-based methods. It will help you to keep track of your spending, as well as giving you real-time visibility of your money (no matter what currency it’s in).

• Digitise your documents: Use your expense management platform’s receipt scanning feature to capture and store receipts, reducing paper clutter and minimising your chances of losing important documentation.

• Start using Corporate Cards: Corporate expense cards improve your control over where your team is spending money, as well as provide real-time visibility into all transactions.

• Regularly reconcile your accounts: Automated bank feeds and reconciliation tools within the platform make it quick and accurate to match expenses with statements.

• Choose software that integrates with your existing systems: Choose a platform that offers seamless integration with your payroll, invoicing, CRM, and tax software, creating a totally connected financial ecosystem that saves your team hours each accounting period.

Simplify your global expense accounts

Hitting revenue targets, scaling your team, securing business funding – these are all common business growth challenges. Although we don’t hear as much about it, mastering expense accounts is a key aspect of the foundation for businesses trying to achieve goals like these.

Having a streamlined expense accounts process can help your business thrive, giving your team back hours of time each accounting period to focus more on doing what they do best – keeping your business ahead of the competition.

Airwallex’s Expense Management software gives you the power to manage and track all your business expenses from one centralised location. You gain real time visibility of your global spend, with a complete view of your team expenses in one place.

Issue Corporate Cards to control and track spend in real-time. Powerful automation tools reduce human error, letting employees upload their expense receipts to the platform, with scanning technology then automatically extracting all the required details – no manual data entry needed!

Reconciliation is also simplified, as you enjoy seamless integration with your accounting software to totally streamline reconciliation, as well as letting employees upload their reimbursement receipts for quick and easy payouts.

Frequently Asked Questions

What is the difference between an expense account and a business expense?

An expense account is a specific category or ledger used in accounting to record and organise business expenses. A business expense is any cost incurred in the normal course of running a business, such as rent, utilities, or office supplies.

How do I categorise expenses for my business?

As well as using the standard expense account categories (Cost of Goods Sold, Operating Expenses, and miscellaneous other expenses), you can make your accounts more exact by using further categories. This could include things like travel, office supplies, utilities, marketing, and employee salaries. Using standardised categories will help you with budgeting, tax reporting, and understanding where your money is going.

What are some common mistakes to avoid when managing expense accounts?

Avoid mixing personal and business expenses, failing to digitise your receipts, or neglecting to update records regularly. Other mistakes include misclassifying expenses and not reconciling accounts, which can lead to inaccurate reporting and tax issues.

Of course, using a digital expense management system will eliminate these issues, streamlining your processes and making it easier to manage your expense accounts.

How often should I reconcile my expense accounts?

Expense accounts should be reconciled at least monthly to ensure your records match your bank and credit card statements. Regular reconciliation helps catch errors or fraudulent activity early and keeps your financial data accurate.

What tools can I use to simplify expense account management?

You can simplify your expense account management by using an expense management platform that lets you manage all your business expenses from one place, including employee cards and out-of-pocket expenses. Digital expense management tools also enable you to move away from the manual processes that take up time and distract your team members from focusing on more strategic work.

Disclaimer: This information doesn’t take into account your objectives, financial situation, or needs. If you are a customer of Airwallex Pty Ltd (AFSL No. 487221) read the Product Disclosure Statement (PDS) for the Direct Services available here.