There are a variety of general expense account headings, and it is not uncommon for companies to create their own account headings. When creating your own account headings, you are required to determine certain rules. Also, as a prerequisite, the heading must be something that can be recognized as an expense.
Correctly understanding expenses in appropriate account headings can also help you gauge a company’s financial situation and the soundness of its operations. Here we will introduce an overview of expenses, the significance of managing expenses, and the main account headings (items) that are considered expenses for companies.
What is an expense account?
Accounting for expenses is a classification of various expenses according to their nature and use, and is equivalent to “accounting” in a ledger. By keeping a ledger, it is possible to visualize how much was spent on each expense.
What are expenses?
Expenses are an abbreviation for “operating expenses.” Although they have various uses, they refer to expenditures necessary for business operations and business activities.
Of the five components of the balance sheet and income statement (expenses, revenues, assets, liabilities, and equity), expenses are classified as “expenses.” Expenses are a component of the income statement, and many of them are classified as “losses” under tax law.
There is a wide range of items that can be considered expenses, and various expenditures can be recorded as expenses. However, unless the tax office ultimately approves it, it cannot be treated as an expense. If an inappropriate account item is recorded as an expense, the tax office may point out that it needs to be corrected, and you may have to spend a lot of effort on the correction work. That is why proper accounting is necessary.
Accounts can be set up to suit your company
It is possible to set up new account items depending on the industry or business type. If there are no appropriate account items, or if you want to subdivide an account item that you use frequently, you may set up a new account item. However, be careful not to create too many unique account items, as this can make accounting procedures complicated.
If you create your own accounts, here are some rules to follow:
- Avoid abbreviations or industry jargon and make the name easy for everyone to understand
- Once selected, it cannot be changed, so continue to use the same account
- Same as the account title on the financial statements
The benefits of accurate expense management
Accurate expense management provides the following benefits:
Cost reductions can be achieved
By managing your expenses properly, you can accurately understand your current costs, allowing you to cut only what you need and only spend what you don’t.
There is a tax saving effect
Recording expenses can reduce profits, which can result in lower corporate taxes.
Helps in judging business conditions
Accurately recorded accounting books allow you to visualize your current financial situation. From there, you can clarify “products that are truly profitable” and “expenses that are cutting into profits,” and use this information to make management decisions.
Be able to clearly explain your financial situation
When you need to explain your financial situation to stakeholders such as shareholders, banks, or the tax office, knowing your expenses will allow you to do so more accurately and clearly.
However, in order to accurately manage expenses, it is necessary to understand what constitutes an expense. Below, we will introduce the main account items.
Major accounting items that are business expenses
We will introduce the account items that correspond to expenses and the details of the expenses recorded in each account item. Expenses are assumed to be expenses related to business.
The main account items are as follows:
Salary and wages
Salaries and wages paid to employees. Includes additional cash and in-kind payments. Bonuses and retirement benefits are often listed under separate accounts.
Land rent
Rent for buildings and land. Offices, stores, parking lots, land rent, etc. If you use your office and home at the same time, calculate it proportionately. Includes key money, renewal fees, and rights fees.
Purchase
Cost of goods and materials for sale and manufacturing. This includes the cost of materials to create finished products, even if you purchase and sell finished products.
Taxes and charges
Public charges include national and local taxes, business and property taxes, and subsidies to the state and public organizations.
Water and utility costs
Bills for water, gas, electricity, etc. Bills for water, gas, electricity, etc. May also include heating/cooling and kerosene.
Communication costs
Charges apply for telephone, mobile phone, and internet connections. If a mobile phone is used for both business and personal purposes, the charges are calculated proportionally.
Travel expenses and transportation expenses
Commuter commuter passes, hourly parking fees, business trip travel expenses, highway tolls, etc. Also includes hotel accommodation costs at business trip destinations. If you use a personal transportation IC card, make it clear that it is for business use.
Advertising expenses
Costs for advertising in magazines, newspapers, television, websites, etc. Also includes costs for creating and printing your company’s corporate information and product flyers.
Entertainment expenses
Expenses for entertaining business partners, congratulatory gifts, etc. Also includes expenses for gifts such as midyear and year-end gifts, souvenirs, and tea and sweets.
Consumables cost
This applies to items that are consumed in a relatively short period of time, such as stationery, business cards, light bulbs, etc. The cost covers fixtures and fittings with a usable life of under one year or an acquisition cost below $2,500 or less per item.
Employee Benefits
Expenses for the recreation, hygiene, medical care, and health of all employees, etc. Travel expenses for recreation, rent for company housing, employer’s share of health insurance and employee pension insurance, etc.
Property insurance premiums
Insurance for business assets is covered. Fire insurance, earthquake insurance, automobile insurance, etc. If the contract period is 2 years or more and you pay in a lump sum, only the premiums for that year are covered.
Depreciation
Depreciable assets with an acquisition cost exceeding $2,500 are recorded as expenses in installments based on their useful life.
Packing charges
Packing and packaging costs, transportation costs, postal fees, etc. when shipping products. Communication costs when sending documents. Packing materials are only applicable for the amount used.
Outsourcing costs
Labor costs and subcontractor fees paid to outsourced companies, such as design, system development, and outsourcing costs for operations. Expenses for outsourcing in-house cleaning to a cleaning company and dispatch fees to a temporary staffing agency are also included.
Bad debt loss
Receivables (accounts receivable and loans) that cannot be collected from the other party. Also called bad debts.
Repair costs
Repair and maintenance costs apply to offices and company cars, among other items. These costs are valid only if the items are returned to their original condition. If the items’ value increases, the increase is recorded as an asset.
Repair reserve fund
Expenses set aside for the purpose of repairing buildings. If you are renting an office, expenses paid to the owner or management company are recorded.
Interest discount fee
Business loans, car loan interest, and discounts on bills all involve interest payments. Loan repayment involves both principal and interest. However, only the interest is considered an expense, not the principal portion.
Rent
Rental fees for equipment, automobiles, office equipment, fixtures, furniture, etc.
Newspaper and book expenses
Expenses for newspapers, books, magazines, etc. necessary for business. Can only be recorded if directly related to business, and magazines and newspapers placed in the break room are considered employee welfare expenses.
Vehicle expenses
Expenses for cars used for business purposes. Vehicle inspection fees, gasoline, etc. Automobile tax and repair costs may be included in vehicle expenses. Automobile insurance is often included as non-life insurance premiums, and gasoline costs can be included as travel expenses.
Interview fee
Expenses for interviews and writing manuscripts. This includes meals and phone calls with interviewees, and train and taxi fares to the interview location.
Conference Fee
Expenses incurred for meetings, consultations, and preparations. This applies not only to meetings held only by your own employees, but also to meetings with business partners. Facility usage fees, prepared lunches and drinks, etc.
Payment fee
Bank transfer fees and cash on delivery fees incurred when making payments, brokerage fees to real estate companies when selling real estate, etc. Also includes consulting fees to tax accountants and lawyers, and consultation fees and fees to consultants.
Deferred Assets
An account for recording expenses as assets when the effects of the expenses incurred are expected to continue for a long time into the future, such as bond issuance expenses, research and development expenses, and start-up expenses.
Donations
Donations to national and local governments, other corporations, and organizations are common. Such donations to governments can be recorded in full as expenses, but there is a limit to the amount that can be recorded for other donations as a general rule.
Miscellaneous expenses
Business expenses that cannot be classified under existing account items. It is not advisable to record too many of these expenses, as they will make the details unclear. Once recorded as miscellaneous expenses, they will remain as miscellaneous expenses thereafter.
The above is only a general classification. There are various types of expense accounts, and some of them do not have clear boundaries. Companies can set their own rules, but in that case, it is important to make the company rules known to everyone in the company and to abide by them.
To manage expenses more accurately
The challenge is that it is time-consuming to select the appropriate expense account item from the many available and manage them accurately.
In order to claim expenses, you need a receipt or invoice to prove that you used the item. However, it is not easy to find the time to save and manage receipts while still doing your regular work. In addition, because tasks such as creating invoices and applying for expenses arise, managing expenses requires a certain amount of effort and the creation of rules.
It is not only accounting staff who specialize in accounting processing who submit expense claims. Many expense claims are also submitted by general employees, such as those in the sales department. When an employee who is not familiar with accounting submits an expense claim, there may be many errors in the claim.
Managing expenses is the first step to properly managing your company’s financial situation.
Expenses range from small expenses such as transportation costs to large amounts such as purchases and rent, and it is necessary to process account items of various types and amounts. By recording expenses under the appropriate account, it is possible to accurately understand and manage what a company is spending its money on. In order to perform accurate journal entries and bookkeeping, it is necessary to understand the characteristics of each expense account item.
However, daily bookkeeping and accurate accounting take a lot of time. For small and medium-sized businesses with limited manpower to process expenses smoothly, we recommend using Agiled, which centralizes the management of expense settlement operations and improves work efficiency.
Conclusion
Effectively managing expense accounts is essential for maintaining accurate financial records, optimizing tax obligations, and making informed business decisions. By understanding which costs qualify as business expenses and categorizing them correctly, companies can gain better visibility into their spending and overall financial health. Whether you’re setting up standard accounts or customizing them to fit your operations, consistency and clarity are key. For small and medium-sized businesses, leveraging tools like Billed can simplify expense tracking and boost efficiency across teams.
FAQs
Aren’t miscellaneous expenses considered expenses?
Miscellaneous expenses are “expenses” incurred in the process of increasing sales from the main business, but are used when the amount is relatively small and there is no need to set up a special account. On the other hand, miscellaneous losses are classified as “non-operating expenses” that are unrelated to sales from the main business.
What are expenses? How do I account for them?
Expenses are an abbreviation for “operating expenses.” Although they have various uses, they refer to expenditures necessary for business operations and business activities. Among the five components of the balance sheet and income statement (expenses, revenues, assets, liabilities, and net assets), expenses are classified as “expenses.” Expenses are a component of the income statement, and many of them are classified as “losses” under tax law.
What accounts are included in expenses?
Account items that are often used in expense settlement include “travel expenses,” “entertainment expenses,” “meeting expenses,” and “consumable expenses.” As mentioned above, expenses on the income statement are divided into four categories: “cost of sales,” “selling, general and administrative expenses,” “non-operating expenses,” and “extraordinary losses.” Account items are further divided into categories such as “salary” and “rent.”
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