Reimbursement of Personally Paid Business Expenses

A small business with the owner as the main or only worker should implement a judicious policy of expense reimbursement that’s similar to major organizations. Solo enterprises are in fact the most likely operations to incur business expenses paid with personal funds. This often occurs when using a personal credit card for company purchases.

The business treats a reimbursed expense as if having paid for it directly. The reimbursement is recorded in an expense category of the company’s accounting system that describes the type of expenditure. Creating nebulous categories with such names as “Reimbursements” or “Credit Card Payments” obscures the actual business purpose. Instead, use an expense account that classifies the cost exactly as you would for non-reimbursed directly paid expenditures.

A sound reimbursement policy assures that you don’t miss claiming valuable tax deductions, improperly classify business expenses, or suffer cash drains of uncertain origin.

Limit the Episodes

Limiting the occurrences of reimbursing expenses is most desirable. The easiest solution deployed by entrepreneurs is having a single credit card devoted entirely to business purchases. Bookkeeping steps account for each credit card charge as it occurs. Since all the charges are company costs, the credit card bill is simply paid by the company. The bill payment is allocated to the credit card liability account on the Balance Sheet to which the charges were applied.

A credit card provider that supports an account for the business – rather than the owner – will issue secondary cards if you have employees. This allows tracking of charges by each worker.

In an era where almost anything may be purchased with a credit card, cash advances are generally unnecessary. Company policy should prohibit cash advances – even to the owner. If you must spend cash for a small item, place the receipt in the business records and collect a reimbursement. This is the same procedure you would utilize with an employee. And remember for the bookkeeping to record the same category of expense that would apply if the expense had been directly paid by the business.

Avoid Complications

Personal expenditures inadvertently charged on a company credit card are not business expenses. An owner may easily make the mistake of charging something like a personal dry cleaning bill on the company credit card. Account for these charges as owner distributions. With all credit card charges recorded on the books – even these owner distributions – the liability balance in the bookkeeping system will match the eventual credit card bill.

Setting a standard of recording every charge exactly as it will appear on the credit card bill assures easy reconciliation of the books to the credit card statement. Avoid the temptation to make a bookkeeping entry for a group of charges. This technique is suitable only when reimbursing multiple expenses paid with cash or a credit card not dedicated exclusively to business. A single charge may be divided into multiple expense categories. For instance, meals while traveling for business must be distinguished in the company’s accounting from lodging and transportation. And personal entertainment during a business trip is not tax-deductible despite the allowable deduction of travel costs.

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