Expense accounts
Summary definition: Financial accounts used to track and record the operational costs a business incurs during an accounting period.
What are expense accounts?
An expense account is an account used to record a business's operating costs during a specific accounting cycle. These accounts help organizations understand where money is spent and how it impacts profitability by tracking various business expenses, such as payroll, rent, and utilities.
However, not all business financial accounts are expense accounts. Asset accounts (e.g., cash, inventory, or equipment) and liability accounts (e.g., loans payable), for example, represent what a business owns or owes, not costs incurred from daily operations.
Key takeaways
- An expense account captures an organization’s operational costs within a specific accounting period.
- Expenses in accounting vary widely, so understanding the possible expense account types (e.g., operating, administrative, sales, etc.) and how they generally differ from other business accounts (e.g., asset accounts) is essential for accurate and reliable financial reporting.
- Consistent expense categorization and account reviews allow organizations to monitor spending patterns, support compliance, and enhance budgeting analysis.
Why is an expense account important?
Expense accounts provide clear visibility into a company’s operating expenses, allowing organizations to accurately measure profitability, control spending, and support informed financial decisions.
Systematically recording costs incurred in each accounting period ensures that financial statements reflect true operating performance while complying with accounting standards. This, in turn, helps finance and spend management teams identify trends, manage budgets, and improve overall financial control.
How does an expense account work?
While certain details can vary by organization, expense accounts largely follow a consistent process when recording and reporting expenditures:
- Expense incurred: A business purchases goods or services to support operations.
- Expense recorded: The cost is assigned to the appropriate expense account, with a corresponding entry made to a bank or liability account based on how the expense is paid (i.e., credit an expense account or debit an expense account, credit a liability account or debit a liability account, etc.).
- Review and reconciliation: Expenses accumulate throughout the period and are reviewed to monitor spending and confirm the accuracy of the cycle’s overall statement.
- Cycle closing: Expense account balances are closed, reported, and reset to zero for the start of the next accounting period.
Types of expense accounts
Examples of expenses in accounting range from basic utilities to public relations consulting to employee wages. Expense accounts, therefore, can take several different forms depending on the types of costs they record and track:
- Operating accounts: Track day-to-day costs required to run the business, including rent, utilities, office supplies, and insurance.
- Payroll and employee accounts: Record wages, salaries, benefits, payroll taxes, and other employee compensation costs.
- Selling and marketing accounts: Capture expenses tied to product or service promotions, including advertising, commissions, and marketing software.
- Administrative accounts: Includes specialized overhead costs, such as training services and consulting fees.
- Depreciation accounts: Amortize the cost of long-term, intangible assets over their useful lives, reflecting gradual usage and value.
Other business accounts
Despite covering a wide range of costs, expense accounting is not the only type of accounting a business needs to function. Other business accounts, such as revenue or asset accounts, track other equally important aspects of an organization’s value and profitability.
| Account type | What it represents | Examples |
| Asset accounts | Resources the business owns or controls |
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| Liability accounts | Financial obligations the business owes to others |
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| Equity accounts | Ownership interest retained in the business by various agents or entities |
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| Revenue accounts | Income earned from normal business activities |
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