Keeping track of the money that leaves your business may not be as fun as counting therevenueyou bring in throughsales. But understanding how much you spend is just as important as knowing how much money you make.
By maintaining records of your expenses, you can better understand the cost of running your business and calculate yourprofits.
Here's how to make yourbookkeepingentries for expenses and common examples you may come across.
What Are Journal Entries for Expenses?
Journal entries for expenses are records you keep in your general ledger or accounting software that track information about your business expenses, like the date they were incurred and how much they cost.
Business expenses can include a range of things, like rent,payroll, andinventory.
In business, you record all transactions (including expenses) using a double-entry accounting system. In other words, each accounting record includes a debit and a credit, and the amount of debit and credit should be equal for each record.
Is an Expense a Debit or Credit in a Journal Entry?
An expense is considered a debit in a journal entry. This debit shows that your expense account has increased—or the transaction has increased your total costs.
That said, the debit is just one-half of the accounting entry. You need to balance it with a credit.
How Do You Record a Journal Entry for an Expense?
To record an expense, you enter the cost as a debit to the relevantexpense account(such as utility expense or advertising expense) and a credit to accounts payable or cash, depending on whether you've paid for the expense at the time you recorded it.
You credit your cash account to record money leaving the business if you've paid for the expense. But if you have yet to pay for the expense, you credit accounts payable to show the money you owe.
While this might seem like a small distinction,accountingandfinancial statementsare all about the details.
Let's see the accountingjournal entriesfor cash, accounts payable, and other common expenses.
Examples of Journal Entries for Expenses
There are several types of expenses you can incur as a result of owning and operating a business.
Here are some examples showing the journal entries for some of the more common expenses.
Journal Entries for Cash Expenses
Let's say that you bought $1,000 worth of office supplies and you pay the vendor the same day.
Cash Expenses
| Date | Account | Debit | Credit |
|---|---|---|---|
| 02/01/2023 | Office supplies | $1,000 | |
| Cash | $1,000 |
The $1,000 debit shows that your total office supplies expenses increased by $1,000. The $1,000 credit to the cash account represents the money leaving your business's bank account.
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Journal Entries for Payments on Credit
Businesses that follow Generally Accepted Accounting Principles(GAAP) must use theaccrual accountingmethod, which means that you record expenses and revenue on the day they are incurred.
But you don't always pay for your expenses on the same day they are incurred.
For example, let's say you placed that $1,000 order on Jan. 20. The vendor delivered the products and gave you an invoice on Feb. 1, but you didn't pay it until the products were delivered on Feb. 10.
If that's the case, you still need to record the expense when it was incurred on Jan. 20, but you'll use the accounts payable account for the credit. Generally, youincur expenseswhen you submit the order or are billed by thevendor.
Here's how the journal entry for the expense would look.
Payments on Credit
| Date | Account | Debit | Credit |
|---|---|---|---|
| 01/20/2023 | Office supplies | $1,000 | |
| Accounts payable | $1,000 |
By crediting accounts payable, which is aliability account, this entry shows that you owe your vendor $1,000.
You'll create another entry on Feb. 10 when you pay the invoice.
Payments on Credit
| Date | Account | Debit | Credit |
|---|---|---|---|
| 02/10/2023 | Accounts Payable | $1,000 | |
| Cash | $1,000 |
This entry shows that you no longer owe the $1,000 because you paid it via the cash account. The cash account is anasset account, so the $1,000 credit represents a decrease in your cash.
Journal Entries for Estimates of Upcoming Expenses
In the previous example, you received an invoice and recorded the $1,000 of unpaid office supplies by crediting accounts payable.
But what happens for expenses that you're incurring but don't know how much the cost will be? For example, for electricity, you're billed after the fact based on the amount you use.
In that case, you can use accrued expenses (also known asaccrued liabilities) to record unpaid expenditures that you have to estimate, such as your utilities or income taxes.
Let's say that your electric company bills you every two months for service, but you want to record your monthly electricity expense. Based on past bills, you can estimate your monthly electricity expense. (We're assuming $500 in this example.)
Here's how you would record that expense for January.
Upcoming Expenses
| Date | Account | Debit | Credit |
|---|---|---|---|
| 01/01/2023 | Utilities expense | $500 | |
| Accrued expense | $500 |
Journal Entries for Payroll
Another common expense for business owners is the cost of paying employees. In this case, the total value of your payroll gets recorded in the payroll expense account.
Here's one example of preparing ajournal entry for your payrollexpenses.
Payroll
| Date | Account | Debit | Credit |
|---|---|---|---|
| 01/01/2023 | Wages | $6,500 | |
| Payroll taxes | $3,300 | ||
| Cash | $9,800 |
Paying employees is often one of the most significant expenses for small business owners. Not to mention, there's more to payroll than just salary. WithHourly payroll software, you can automatically run payroll and calculate related costs, like taxes andworkers' comp—all in one click.
Journal Entries for Depreciation
Depreciationis an accounting tool businesses use to record the loss in value of physical assets (like vehicles or machinery) over time. It's recorded on financial reporting documents, likebalance sheets andincome statements.
Typically, you record depreciation at the end of the year to show how much value the long-term assets have lost during the year.
For example, let's say you own a piece of machinery, and you've determined that it loses $1,000 in value each year.
Here's how you would record that expense.
Depreciation
| Date | Account | Debit | Credit |
|---|---|---|---|
| 12/31/2023 | Depreciation expense | $1,000 | |
| Accumulated depreciation | $1,000 |
Journal Entries for Your Customers' Unpaid Bills
When a customer can'tpay off their account, you take on that expense. There are two ways to recognize these uncollectible accounts: the direct write-off method and the allowance method.
Using the direct method, when you realize an accounts receivable account is uncollectible, you write off the amount to bad debt.
For instance, say you have a customer with an outstanding bill worth $1,000. If that customer goes out of business and can’t pay the bill, here’s how you’ll record that expense using the direct write-off method.
Unpaid Bills
| Date | Account | Debit | Credit |
|---|---|---|---|
| 01/01/2023 | Bad debt expense | $1,000 | |
| Accounts receivable | $1,000 |
Using the allowance method, you estimate the amount of receivables that will be uncollectible and reduce your accounts receivable balance with a contra account called allowance for doubtful accounts.
In business, doubtful accounts refer to any amountthat you don’t expect to collect.
For instance, say you haveoutstanding receivables worth $100,000, and based on your history, you know 1% of your receivables will never be collected.
Here’s how you’ll record that allowance and the related expense:
Unpaid Bills
| Date | Account | Debit | Credit |
|---|---|---|---|
| 01/01/2023 | Bad debt expense | $1,000 | |
| Allowance for doubtful accounts | $1,000 |
Journal Entries for Adding to Your Petty Cash Fund
Petty cash is an account of cash that's usually kept on hand and used for small purchases, like office supplies.
While you don't need to make an accounting entry when you spend petty cash, you do need to record an entry when you move money from your cash account to the petty cash account.
Here's how.
Petty Cash
| Date | Account | Debit | Credit |
|---|---|---|---|
| 01/01/2023 | Petty cash | $250 | |
| Cash | $250 |
Journal Entries for Prepaid Expenses
In some cases, you may end up prepaying for certain expenses. This can happen if you purchasebusiness insuranceor pay rent for a few months or an entire year upfront.
Let's say that you paid for six months of office rent upfront in January. The amount that was prepaid (rent for February through June) gets recorded as an asset in a prepaid rent account.
Prepaid Expenses
| Date | Account | Debit | Credit |
|---|---|---|---|
| 02/01/2023 | Prepaid rent | $5,000 | |
| Cash | $5,000 |
On the first day of February, you make a journal entry to move that month’s rent out of prepaids and into expenses:
Prepaid Expenses
| Date | Account | Debit | Credit |
|---|---|---|---|
| 02/01/2023 | Rent | $1,000 | |
| Prepaid rent | $1,000 |
This way, your monthly expenses take rent into account, even if you paid for it ahead of time.
Final Thoughts on Expense Tracking and Accounting
Keeping track of all of your business transactions shows you how cash flows in and out of your company.
When you prepare a journal entry for an expense, there are two steps: First, you debit the relevant expense account, which represents the increase in costs.Second, you need to record the same amount as a credit.
If you've paid for the expense, you'll credit your cash account, and if you still owe the money, you'll credit accounts payable or accrued expenses.
Now that you know how to record expenses in your general journal, you'll better understand how much you spend and what it costs to keep your business open.
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