accounting made sense

Journal Entry for Expense Reimbursement – An Easy Guide

Journal Entry for Expense Reimbursement - An Easy Guide Featured Image

Table of Contents

Sometimes, employees pay for business expenses out of their pockets. They may be on a business trip and need to pay for expenses such as gas, transportation, or meals. In some cases, businesses may pay expenses that should be paid for by other parties, such as a client. Hence, knowing how to record journal entries for expense reimbursements is quite important.

In this guide, we’ll cover journal entry examples for two instances: reimbursable expenses incurred by employees and client-reimbursable expenses (Billable Expenses).

Reimbursable Expense Incurred by Employees 

When employees pay out of their pockets for business expenses, they should ask for reimbursement so that 1) they get refunded for the non-personal expense and 2) the business gets to utilize expense deductions for taxes. The first step begins with an expense report where the employee must list all reimbursable expenses.

After submitting the report for reimbursement, an approver typically reviews the report to check for non-reimbursable items. Once approved, the report will then be forwarded for payment processing.

The key to the journal entry or accounting treatment for reimbursable expenses incurred by employees is that since it is a legit business expenditure at its core, the P&L impact is recorded the moment the employee spent the money instead of when the business reimburses the employee – see below for an example.

Advertisement
Continue Reading Below

Journal Entry To Record the Employee Expense

Typically, after the expense report is approved and before payments are released, the accountant should record the expense in the books. 

For example, let’s assume that one of our employees paid $150 for meals at a client meeting. The supervisor approved the expense and forwarded it to AP for payment. The journal entry looks like this:

Journal Entry for Expense Reimbursement - Approved Expense report

Notes on the entry:

  • The debit of $150 to meals and entertainment expenses is the amount the employee paid on behalf of the company. We record it as an expense because it is a legitimate business expense incurred on behalf of the company.
  • The credit of $150 to employee reimbursements establishes our debt to the employee. This account is a liability account.

Journal Entry To Record Payment to the Employee  

After the expense has been recorded in the books, it will be processed for payment. There are mainly two ways to pay expense claims. First, you can pay them immediately by issuing a check that the employee can deposit to the bank (or through a direct wire transfer). Second, you can include the payment in their paychecks. 

If paid right away, the journal entry looks like this:

Journal Entry for Expense Reimbursement - Reimbursement paid via a Check

Notes on the entry:

  • The debit of $150 to employee reimbursements is the reversal of the liability we recorded earlier since the liability is now settled.
  • The credit of $150 to Cash represents our payment to the employee via a check or wire.

Alternatively, if included in their paycheck, the journal entry looks like this:

Journal Entry for Expense Reimbursement - Reimbursement added to paycheck

Notes on the entry:

  • The $150 debit to employee reimbursements reverses the liability we recorded earlier since the liability is now settled.
  • The $150 credit to salaries payable adds the reimbursement to the employee’s accrued paycheck, which will be paid out later.
  • Operational tip: It’s always a good practice to coordinate with payroll in the expense reimbursement process so that they can add reimbursement to the payslips.
Advertisement
Continue Reading Below

Client-Reimbursable Expenses (Billable Expense) 

Client-reimbursable expenses or billable expenses are common for service-based businesses or freelancers. For example, contractors or consultants may receive a meal allowance from their clients. But instead of the client giving them cash, they’ll pay it out of pocket and then bill the expense to the client. When recording client-reimbursable expenses, it’s always the best practice to keep the receipts so that later, you can add the expense to the invoice and send it to the client for billings.

The key to the journal entry or accounting treatment for client-reimbursable expense/billable expense is that since it will not count as a business expense (as it will be reimbursed), there should be no P&L impact. The journal entry will pass through an asset or receivable account instead – see below for an example.

Journal Entry To Record the Billable Expense

Let’s assume that a contractor incurred billable expenses of $200 for John Doe, the client. The client agreed to the expense. The journal entry to record the billable expense looks like this:

Journal Entry for Expense Reimbursement - Billable Expense

Notes on the entry:

  • The $200 debit to accounts receivable adds the billable expense to John Doe’s account. It’s important that we specifically debit this to John Doe’s subsidiary ledger.
  • The $200 credit to cash is our payment for the billable expense. In some cases, businesses or freelancers may use credit cards to pay for these expenses. Hence, instead of crediting cash, you may credit it to a credit card liability account instead.

Journal Entry To Record Client’s Payment

Now that we’ve debited the billable expense to the client’s A/R account, the last entry is to record the payment. For this example, let’s assume that John Doe paid the $200 billable expense. The journal entry looks like this:

Journal Entry for Expense Reimbursement - Billable Expense received

Notes on the entry:

  • The debit of $200 to cash signifies that we received payment for the billable expense.
  • The credit of $200 to accounts receivable clears the obligation of our client, in this case, signifying that John Doe has settled this reimbursement.
Advertisement
Continue Reading Below

Key Takeaways

  • Recording reimbursable expenses incurred by employees involves a debit to the appropriate expense account (e.g., meals and entertainment expenses or transportation expenses) and a credit to Employee reimbursements (liability).
    • The P&L effect is incurred when the expense was paid for by the employee and not when they were reimbursed.
    • Employee reimbursements can either be paid right away or added to their paychecks.
      • If paid immediately, we debit Employee reimbursements to reverse the liability and credit Cash.
      • If added to the paycheck, we debit Employee reimbursements and credit Salaries payable.
  • The journal entry to bill clients for client-reimbursable expenses (billable expenses) includes a debit to Accounts Receivable and a credit to Cash.
    • Client-reimbursable or billable expenses have no P&L impact because of their pass-through nature.

Leave a Reply

Your email address will not be published. Required fields are marked *

Table of Contents