Keeping track of the money that leaves your business may not be as fun as counting the revenue you bring in through sales. 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 your profits.
Here's how to make your bookkeeping entries 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, and inventory.
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 relevant expense 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, accounting and financial statements are all about the details.
Let's see the accounting journal entries for 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.
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Journal Entries for Payments on Credit
Businesses that follow Generally Accepted Accounting Principles (GAAP) must use the accrual accounting method, 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, you incur expenses when you submit the order or are billed by the vendor.
Here's how the journal entry for the expense would look.
By crediting accounts payable, which is a liability account, this entry shows that you owe your vendor $1,000.
You'll create another entry on Feb. 10 when you pay the invoice.
This entry shows that you no longer owe the $1,000 because you paid it via the cash account. The cash account is an asset 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 as accrued 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.
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 a journal entry for your payroll expenses.
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. With Hourly payroll software, you can automatically run payroll and calculate related costs, like taxes and workers' comp—all in one click.
Journal Entries for Depreciation
Depreciation is 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, like balance sheets and income 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.
Journal Entries for Your Customers' Unpaid Bills
When a customer can't pay 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.
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 amount that you don’t expect to collect.
For instance, say you have outstanding 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:
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.
Journal Entries for Prepaid Expenses
In some cases, you may end up prepaying for certain expenses. This can happen if you purchase business insurance or 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.
