Why Are Expense Reports So Important?

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. Creating a process to track expenses is just as important as the reports themselves.

What is an Expense Report?

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, such as travel, food, supplies, etc. An expense report itemizes those expenditures eligible for reimbursement, and receipts are typically 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 and 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. Examples of expenses include:

• ​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. By analyzing this data, companies will know exactly how much they need to spend on updating licenses every year, how much they spend on gas, and how that amount will change if they add another truck. They can also identify ways to save money, such as determining if buying new equipment is more cost-effective than repairing existing equipment.

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.

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 them to accounting. Once approved, the expenses are reimbursed either monthly or quarterly, and the paper expense report is filed into a cabinet. There are multiple steps along the process that are prone to error. Tracking paper receipts is tedious and unreliable, as paper can easily get lost and some receipts can become illegible if stored for a long time. The accounting person has to go through each of the submitted paper receipts, which is time-consuming and can lead to errors.

Spreadsheets: Using an Excel or Google Sheets spreadsheet is a step up from tracking expenses on paper. This method allows companies to use an expense report template, 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: Date, 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, but relying on spreadsheets for expense tracking still has some concerns. Spreadsheets aren’t secure, and all that data must be manually inputted, which means errors. Studies have found that nearly 90% of spreadsheets contain errors, likely due to the fact that spreadsheets can be overwritten, which also opens companies up to fraud.

HR Management Software: HR management software takes your data and securely inputs it into systems that automate the entire expense management process, like accounting software. Security features only give access to certain employees, eliminating risk. 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 tracking down expense reports and receipts.