Picture this: there you are, business owner extraordinaire, at work and making magic happen. Your employee calls and says he is stopping at the store, and asks do you need anything for the office.
You do and you are ecstatic that you don't have to go to the store during your lunch break! So, you rattle off the list of office supplies you need and you get back to work.
Except one small detail. When your employee shows up with all of your office supplies, it finally hits you that he didn't have the company credit card. And now he needs his money back. But you don't really know how to make that happen.
If this has ever happened to you, read on. I'm tackling this confusing topic for you below.
As a bookkeeper, one of the most common questions I get from business owners is: How do I pay myself or my employees back for purchases made with personal money?
For example, if you or one of your employee goes on a business trip, but don’t have the business card to pay for expenses on the trip, it makes sense that some expenses will be made on personal accounts.
Often another situation occurs when an employee is at the store and the business needs one or two things and the employee just picks it up and pays with their personal money.
These are just a couple of examples of how a business would end up owing the owner or employee for business expenses.
These situations occur quite often in business, and not knowing how to handle it can be stressful for the business owner.
So, let’s talk about that.
The big question is this:
How do you reimburse someone from the business? And more importantly, how do you track that on your books?
Well, I’ve got your answers today!
First of all, it is important to track all of the expenses that need to be paid back to you or your employee. It is helpful and important to know exactly what expenses need to be paid back on one big list, so everyone knows what the expenses were and what the total amount is that should be paid back.
To do this, you’ll use a form called an Expense Report. You may have heard this term before somewhere along the way. This is a common form that all businesses will use. Sometimes this is called a Reimbursement Request Form.
This is a template or form that has all of the information required for the business’ records and documents what charges were made by the employee. This will have the date, name of person being paid back, a detailed explanation of why these purchases were made, an itemized list of expenses, and a grand total of amount to be reimbursed.
If you need one of these forms, I’ve got a template you can use. Grab it for free and use it right away!
One thing to be aware of is you need to make sure all of the original receipts are included. Those are business expenses and the IRS wants you to have the original receipts on file.
Once you have the expense report (or reimbursement request) from the person who needs to be paid back, go ahead and pay them back from the business account. You can write them a check, pay them with petty cash, include the reimbursement as a non-tax reimbursement on their paycheck, or wire the money directly to their bank account.
Once that is done, you’ll need to track this in your books to make sure you’re accounting for the expenses in your business.
To do this, you’ll enter the expense like you would enter any normal expense into your books. You’ll use the date reimbursed, note the employee being paid back, and detail what expenses you’re reimbursing. The expenses will be added to your books because these are expenses that the business incurred and it is important to not only capture the expenses the business incurred, it is important to track the funds that were used to pay the employee back.
When you enter these expenses into your books, you’ll enter them into expense accounts. The account names will vary depending upon your particular Chart of Accounts and normal procedures. Most commonly, business will either use a Reimbursed Expense account, or they’ll break the expense down into each category of expense reimbursed. For example, if you are paying for travel costs, you’ll use your Travel Expense categories to enter the expense.
One thing to note: If you are paying the expenses back via paycheck reimbursement, it is normal for the software to limit you to place this reimbursement in one expense account and not allow you to break out the individual expense accounts on the paycheck. This default account is usually called Reimbursement Expenses. An adjustment can be made after the fact if you want the expense to be added to the actual expense accounts used.
After that, you’re all done! Keep the records in your filing cabinet, and cross that task off your to-do list.
Don't forget to download that Expense Report Template here!