How to Record Expenses and Losses for a Business
To make a profit, business managers have to control expenses. This task requires a good deal of information about how to record expenses and losses. How many expense accounts should a business maintain? There’s no easy answer to this question.
To get an idea of the broad range of expenses a business may have and therefore needs to account for, imagine a business with $10 million annual sales revenue. With that much revenue, you know right off that this company isn’t a small, storefront operation. The business probably has more than 50 employees and hundreds or thousands of customers. It may have several locations, and it pays property taxes on its real estate.
The business may manufacture the products it sells, or it may be a retailer that buys products in condition for resale. Most likely, it buys insurance coverage to protect against various risks. It also probably advertises the products it sells. For a $10 million business like this one, you might expect to find several hundred different expense accounts — even a thousand or more is possible.
Most businesses with $10 million annual sales revenue have total annual expenses over $9 million, or more than 90 percent of their sales revenue. Few businesses earn 10 percent or higher bottom-line profit on their sales revenue. It takes a lot of accounts to keep track of over $9 million in expenses.
Accountants record expenses by decreasing assets or increasing liabilities. Many different assets and liabilities are credited in making expense entries. The amounts recorded for certain expenses aren’t definite or clear-cut. To complicate matters further, the liabilities used to record certain expenses are difficult to understand.
The summary below matches expenses with the balance sheet accounts that are credited in recording the expenses. For instance, in recording cost of goods sold expense, the inventory asset account is credited. Many different expenses are recorded when cash disbursements for the expenses are made. This shows that a specific expense account is recorded when a cash payment is made. The expense could be one of many in the business’s chart of accounts.