We all understand that tracking mileage expense is a great way to account for the wear and tear on personal vehicles used for business. However, one of the common questions many encounter is, “How do I correctly make a journal entry for this?” See below for a walk-through.
Understanding and Tracking Mileage Expense
At its core, mileage expense is the cost associated with using a personal vehicle for business purposes. There are two main reasons why we should keep track of mileage:
- Tax Deductions & Compliance: The IRS allows deductions for the business use of a personal vehicle. Properly recording mileage is important as the IRS requires detailed and accurate records.
- Reimbursement: If employees use their cars for business trips, they might be entitled to a reimbursement. The accounting record is important for this type of reimbursement.
Staying on top of your mileage records makes doing your taxes easier and keeps your finances tidy and under control.
The mileage rate set by the IRS fluctuates annually. This rate determines the amount that can be deducted for the business use of a personal vehicle. The latest rate can be found on the IRS website under “standard mileage rates.”
Mileage Expense – Journal Entry Example
To record the business owner’s use of a personal vehicle
Option 1 – Set up a separate tracker outside of the general ledger
The best approach? Use a separate tracker instead of adding these figures to the general ledger or booking a journal entry.
The rationale? Mileage expenses are primarily for tax deductions and are not direct costs like purchasing supplies. They estimate wear and tear on a vehicle, which doesn’t fit well with double-entry accounting. For example, there’s no clear money transaction to record when you are driving, the wear and tear value isn’t consistent, and if you’re already recording vehicle costs, adding mileage could lead to double-counting and confusion.
Having a standalone tracker offers clarity during tax audits. It isolates mileage from other transactions, making verification easier and more straightforward.
This separation also keeps financial statements clear, showing only the real operational costs and providing an accurate view of the business’s finances.
Option 2 – Debit Mileage Expense and credit Owner’s Equity.
Let’s say you really want to record this in the general ledger by booking a journal entry – here is one solution.
When recording mileage expenses in this manner, the debit to the “Mileage Expense” account recognizes the cost associated with the use of the vehicle for business purposes. The corresponding credit to “Owner’s Equity” is because of the absence of a direct monetary transaction, as there was no real money spent on it.
At the fiscal year-end, these mileage expenses will be transferred to the “Retained Earnings” account when the book is closed. This transfer offsets the earlier credit to the “Owner’s Equity” account, ensuring no lasting impact on the business’s total equity. (Because both Retained Earnings and Owner’s equity are part of the equity section.) However, by accounting for the mileage expenses, the business’s taxable income is reduced, leading to visible tax savings.
To record the employee’s use of a personal vehicle
Below is an example of when you have to record the employees’ use of their personal vehicle, as they will later get reimbursed.
When an employee uses their personal vehicle for business purposes and is due a reimbursement, the business recognizes the cost of mileage by debiting “Mileage Expense” (or Auto/Travel Expenses). The corresponding credit to the “Employee Reimbursement” account represents the business’s obligation (or liability) to pay back the employee in the future.
Upon reimbursing the employee, the business clears the obligation by debiting the “Employee Reimbursement” account. The corresponding credit to “Cash” reflects the payment made to the employee, thus settling the liability.
- Business Owners Using Personal Vehicles:
- The journal entry is debiting “Mileage Expense” and crediting “Owner’s Equity.” This captures the expense for tax considerations while ensuring no net equity impact after it closes to “Retained Earnings.”
- Optimal Strategy: The ideal way to handle this is by maintaining a separate mileage tracker and not recording a journal entry, as it keeps primary financial records uncomplicated
- Employees Seeking Reimbursements:
- When employees use their personal vehicles for business tasks, the proper approach is to debit “Mileage Expense” (or “Auto/Travel Expenses”) and credit an “Expense Clearing” liability account.
- When the business pays the employee back, it offsets the outstanding amount by debiting the “Expense Clearing” account and crediting “Cash,” thus resolving the outstanding obligation.