What is an expense account
An expense account is a record of what a business spends on day-to-day operations in a given accounting period, which is typically a month, quarter, or year. It organises business expenses into distinct categories – for example, advertising expenses, which includes money spent on ads, promotional material such as brochures, flyers, and others. This categorisation helps businesses track expenses more easily than if they were all recorded in a single account or ledger.
Expense accounts are temporary accounts. At the end of the accounting period, any cash balance in the account is transferred and the account is reset to zero. This ensures the new accounting period begins on a clean slate and companies don't mix up or confuse expenses from different accounting periods.
Apart from optimising expense tracking and management, expense accounts are essential for financial reporting. Expense accounts appear on a company's income statement (or profit and loss statement) under the expenses section. These expenses are deducted from revenue to determine the company's net income or profit.
An expense account is one of five account types used in accounting, the others being:
- Income account, which records revenue earned by a business from the sale of goods or services
- Asset account, which records resources owned by a company, including tangible assets (machinery, property) and intangible assets (trademarks, copyrights)
- Liability account, which is a record of a company's liabilities including unpaid debt, outstanding payments, overdrafts
- Equity account, which represents the owners' and shareholders' claim on a company's assets after the deduction of liabilities
How expense accounts work
Expense accounts record expenses using the double-entry accounting method. Under this method, an expense is recorded both as a debit and a credit in different accounts.
For example, a business spends SGD $1000 on office supplies. This transaction is recorded both as a debit (or increase) in the administrative expenses account and as a credit (or decrease) in the cash account.
Types of expense accounts
Although expense account classifications depend on how a business organises its costs, here are some common expense account types:
Cost of goods sold (COGS)
Expenses directly associated with the production of goods or services a business sells are recorded under this expense account category. They include the cost of raw material, labour, components, shipping, freight, storage, wholesale goods for resale, and so on. Tracking cost of goods sold (COGS) is essential for accurately pricing products and ensuring that your business earns a profit.
Operating expenses (OpEx)
This category covers expenses incurred on running daily business operations, excluding the cost of goods and services. Common operating expenses include rent, utilities, office supplies, maintenance and repairs, office staff salaries, advertising expenses, legal and accounting fees, insurance, and property tax. By tracking operating expenses, businesses can spot wasteful spending, predict future expenditures reliably, optimise cash flow, and take steps to improve overall profitability.
Non-operating expenses
This category includes infrequent and out-of-the-ordinary expenses that are not related to core business operations. Interest payment on loans, losses incurred on the sale of assets, foreign exchange losses, and the cost of settling lawsuits are examples of non-operating expenses.
Expense accounts can be further narrowed down into sub-categories, such as:
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Expense account benefits
By organising diverse business expenses into neat categories, expense accounts enhance financial visibility and enable easy and accurate expense tracking. This transparency helps businesses reduce unnecessary spending, ensure compliance with budget limits, analyse spending habits to uncover cost-saving opportunities, enhance financial forecasting, and make informed, data-driven decisions.
Effective expense account management also supports tax compliance. As business expenses that are “wholly and exclusively incurred in the production of income” qualify as tax-deductible expenses, accurate categorisation and careful tracking helps companies claim eligible deductions and maximise tax savings.¹ By optimising record-keeping, expense accounts enable businesses to stay tax-compliant and avoid potential problems during audits.
Additionally, well-organised expense accounts contribute to accurate financial reporting. When expenses are consistently categorised and properly documented, they produce reliable financial statements that provide a clear picture of a business's financial performance and position. This isn’t only beneficial to stakeholders but also helps businesses meet accounting standards and regulatory requirements more effectively.
How to categorise and manage expenses efficiently
Businesses in Singapore are legally required to maintain proper expense accounts and other financial records for at least 5 years.² Failure to comply can result in additional tax assessments by the Inland Revenue Authority of Singapore (IRAS) as well as penalties. Given these requirements, effective expense categorisation and management is essential for ensuring compliance. Here's how to do it:
Create a chart of accounts (COA)
This is a list of expense accounts relevant to your business. When creating a chart of accounts, start with broad categories before breaking them down into more specific accounts. For example, create an operating expenses category and within it, you can include sub-accounts such as marketing expenses, insurance expense, professional fees, utilities expenses, employee-related expenses, and so on.
This list should be easy to understand and use. Choosing clear, descriptive names for expense categories and applying them consistently across the chart of accounts ensures uniformity and accuracy. In addition to account names, many businesses assign numerical codes to expense categories to simplify recording, tracking, and reporting. Another benefit of numerical codes is that they are more easily processed by accounting software. Using a logical numbering system that groups similar accounts together will make the chart of accounts more organised.
Set spending limits and approval workflows
The purpose of maintaining expense accounts goes beyond expense recording and tracking. Systematic expense accounts provide insights into spending trends and highlight opportunities for cost savings. Businesses can establish spending limits to control costs and reduce the risk of overspending. Adopting a role-based approach to spending limits – for example, a higher entertainment allowance for a sales executive than for an engineer – will ensure that your expense management strategy aligns with operational needs. In addition, tiered approval thresholds and a clearly defined approval hierarchy can strengthen oversight and accountability.
Formulate strong expense policy and guidelines
Effective expense classification and management requires a clear expense policy that establishes consistent guidelines for how expenses should be categorised, recorded, submitted, and approved. In the absence of clear rules, employees may categorise similar expenses differently, resulting in inconsistent reporting, compliance challenges, and analytical difficulties. For example, a client meal may be recorded by one employee under 'entertainment expenses' and by another under 'travel expenses'. A well-defined expense policy helps establish standardised expense categories, clear definitions, spending limits, and approval procedures.
Expense account best practices
Managing a wide range of expense accounts can be complex and time-consuming. However, these simple solutions can make expense account management more efficient and convenient:
- Compare expense reports, corporate card statements, bank statements, and accounting records periodically (monthly or quarterly, for example). Regular reconciliation can catch recording errors, duplicate entries, missing receipts, fraud, and other anomalies before they compound
- Invest in expense management software that automates repetitive tasks, automatically assigns expenses to appropriate categories, streamlines approval workflows, generates real-time spending reports, and sends alerts when expense accounts are near their budget limits. Expense management tools can significantly improve efficiency by reducing human error, eliminating manual paperwork, digitising and securely storing receipts and other supporting documents, and providing a unified view of all business expenses for easier tracking and analysis
- Use a dedicated business account and/or corporate cards. This practice not only helps companies separate personal and business spending but also ensures that all business-related transactions flow through clearly defined channels. This, in turn, simplifies expenses tracking and account reconciliation while reducing errors in financial reporting and tax calculations
Smarter expense management with Aspire
Aspire offers multi-currency business accounts and corporate cards along with a dedicated expense management platform that makes managing expense accounts much more efficient.
Once you sign up for an Aspire business account, you become eligible for our virtual corporate cards. These cards come with customisable spending limits and merchant restrictions to ensure all spending stays within company policy. Our integrated expense management platform further streamlines the process by enabling real-time expense tracking, multi-level approval workflows, and seamless integration with accounting systems.
Conclusion
Well-organised expense accounts are not only meant for recording and tracking expenses. They also offer a higher level of financial control and visibility, inform decision-making, and support tax and regulatory compliance. Adopting a structured and technology-driven approach backed by clear policy significantly simplifies expense management and streamlines business finance.
FAQs
What is an expense account?
An expense account is a record of what a business spends on day-to-day operations in a given accounting period. By organising expenses into distinct categories, a business can maintain multiple expense accounts tailored to its various activities.
What is an example of an expense account?
Operating expenses is a common expense account category. It covers what a business spends on daily operations excluding the cost of producing goods and services, such as rent, utilities, office supplies, repairs and maintenance, and office staff salaries.
What are the 5 basic types of accounts in accounting?
They are expense accounts, income accounts, asset accounts, liability accounts, and equity accounts.
Are expense accounts on a balance sheet?
Expense accounts are reflected on a company's income statement under the 'expenses' section, where expenses are subtracted from revenue to calculate net income or profit. In contrast, a balance sheet reports a company's assets, liabilities, and shareholders' equity.
Is an expense account debit or credit?
Expense accounts follow the double-entry accounting method, which records a transaction as both a debit and credit. For example, what a business spends on rent is recorded as a debit in the relevant expense account and a corresponding credit in the cash account.
What is an employee expense account?
An employee-related expense account is an expense category that records what businesses spend on their employees, including salaries and wages, benefits such as retirement contribution and bonuses, training costs, payroll taxes, and so on.
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