Expense account definition

The expense account concept has two different meanings. One involves travel and entertainment expenses, and the other is a more general concept identifying a type of account. Both definitions are noted below.

The T&E Expense Account

An expense account refers to funds paid to an employee, which are then used for travel and entertainment expenditures. Expense account funds may be paid in advance of the time when they are actually expended on company business, in which case the funds are referred to as an advance. Alternatively, the funds may be paid in response to the submission of an expense report by an employee, in which case the funds are referred to as a reimbursement. An advance is initially recorded as a current asset, while a reimbursement is immediately recorded as an expense as incurred. When an employee submits evidence of how an advance was used, the current asset is then recognized as an expense.

The amount of cash payments associated with an expense account tend to be largest when linked to an employee who operates independently of the internal operations of a business, of which the best example is a salesperson. These individuals need sufficient funding to travel more than is customary for other employees.

The  concept of the expense account can be abused, either by spending more funds than would be required by a prudent person, or by receiving advances and not using the cash on behalf of the business. Consequently, many businesses impose tight controls over the use of expense accounts, including the use of expense reports, travel policies, audits of payments made, and ongoing reviews of the outstanding balance in the advances asset account.

The Expense Account Type

The bulk of all accounts used in the general ledger are expense accounts. This is a type of temporary account in which are stored all expenses incurred by an entity during an accounting period. Thus, there may be expense accounts for bank fees, the cost of goods sold, utilities, and so forth. These accounts are considered temporary, for they are zeroed out at the end of the fiscal year, to make room for the recordation of a new set of expenses in the next fiscal year.