Mastering Small Business Bookkeeping for Employee Reimbursements

Learn how to record mileage, meal costs, and urgent purchase expenses accurately

small business receipts and accounting documents

Key Insights

Accurate Expense Categorization: Different types of reimbursements (mileage, meals, and purchase expenses) must be recorded in their respective expense accounts.
Proper Journal Entries: Each transaction is documented by debiting the relevant expense account and crediting a liability until reimbursement is made.
Supporting Documentation: Detailed receipts, mileage logs, and approved expense reports are critical to maintain compliance and support audits.

Overview of the Scenario

In this scenario, a business owner tasks an employee to drive to a city three hours away to purchase a urgently needed repair part. The owner promises to reimburse the employee for the mileage incurred while using their personal car, the cost of a lunch consumed during the trip, and the purchase of the repair part (which was made using the employee's personal credit card because the store only accepted that payment method). This example demonstrates how small businesses record reimbursable expenses by segregating the types of expense transactions and ensuring each expense is categorized accurately.

Step-by-Step Bookkeeping Process

Recording Reimbursable Expenses

Initial Transaction – Employee Incurred Expenses

When the employee incurs expenses using personal funds, these transactions are not immediately reflected in the company’s financial books until an expense report is submitted. The key elements include:

Mileage Expense: Evaluated based on a per-mile rate (for example, $0.56 per mile if using IRS guidelines). The distance traveled is recorded and later multiplied by the per-mile rate.
Meal Expense (Lunch): Recorded as a travel or meals and entertainment expense. The exact amount spent during lunch is documented.
Repair Part Expense: The employee uses a personal credit card to pay for an urgently needed repair part. This expense is recorded separately as it represents a direct business expense that could either be capitalized as an asset (if the part is significant enough) or recorded as a supplies or repair expense, depending on the company’s policy.

Establishing the Employee Expense Report

Once the trip is completed, the employee compiles an expense report containing all the details of the trip. This report typically includes:

A detailed mileage log with dates, start and end points, and the total miles traveled.
Receipts for the meal expense, including the date, vendor, and amount.
Receipt or credit card statement detailing the purchase of the repair part.
A summary of the expenses, including calculated mileage reimbursement, meal cost, and the price of the part.

Journal Entries in the Accounting Books

Accounting for these expenses requires posting journal entries that accurately reflect both the incurred expenses and the eventual reimbursement. The entries are recorded in two stages:

Stage 1: Recording the Expense Report

1. Mileage Reimbursement

When recording the mileage expense, the entry should capture both the travel cost and establish a liability until reimbursement is made:

// Determining the mileage expense
// Example: 300 miles at a rate of $0.56 per mile gives $168.
// Journal Entry:
Debit: Mileage Expense $168
Credit: Employee Reimbursement Payable (or Accounts Payable) $168

This entry classifies the mileage expense under a travel or vehicle expense account and uses either a dedicated employee reimbursement payable account or adds to a general accounts payable category.

2. Meal (Lunch) Reimbursement

The meal cost is recorded similarly by debiting the relevant expense account:

// Assume the lunch expense is $15.
// Journal Entry:
Debit: Meals and Entertainment Expense (or Travel Expense) $15
Credit: Employee Reimbursement Payable (or Accounts Payable) $15

3. Purchase of Repair Part

Since the employee used their personal credit card, the transaction is recorded as a liability owed to the employee:


// Let’s assume the repair part costs $100.
// Journal Entry:
Debit: Repairs and Maintenance Expense (or Supplies/Inventory) $100
Credit: Employee Reimbursement Payable (or Accounts Payable) $100

The nature of the expense account (Repairs and Maintenance vs. Supplies or Inventory) depends upon whether the part is intended to be used immediately or capitalized as an asset. For many small businesses, small repair parts are often expensed to maintain current operating expenses.

Stage 2: Reimbursing the Employee

After the expenses are recorded as liabilities, when the company disburses funds to the employee, further entries are necessary to clear these liabilities:

Recording the Payment

Once the reimbursement is processed, the listings in the company's books are updated as follows:


// Combined total from the Expense Report = Mileage ($168) + Lunch ($15) + Repair Part ($100) = $283.
// Journal Entry when reimbursing the employee:
Debit: Employee Reimbursement Payable (or Accounts Payable) $283
Credit: Cash/Bank Account $283

This final entry reduces the liability previously recorded for these expenses and reflects the outflow of cash from the company's accounts.

Detailed Expense Recording Summary

Expense Type	Debit Entry	Credit Entry	Documentation Required
Mileage Expense	Mileage Expense (e.g., $168)	Employee Reimbursement Payable $168	Mileage log with dates, destinations, and calculations
Meal (Lunch) Expense	Meals and Entertainment Expense (e.g., $15)	Employee Reimbursement Payable $15	Receipt detailing lunch expense
Repair Part Purchase	Repairs and Maintenance Expense (or Supplies/Inventory) (e.g., $100)	Employee Reimbursement Payable $100	Credit card statement or receipt for the part
Reimbursement Payment	N/A	Cash/Bank Account $283 (total reimbursement)	Approved employee expense report and proof of payment

Differences in the Treatment of Reimbursable Payments

Different Categories of Expenses

While all expenses are eventually reimbursed by the company, they are treated differently in the bookkeeping system based on the nature of the expense:

Mileage: Typically calculated using a standard per-mile rate. It is recorded as a travel expense and is often subject to tax regulation to ensure it is an “ordinary and necessary” business expense.
Meals: Recorded as meals and entertainment or travel expenses. Some jurisdictions impose limits or percentage caps on the deductibility of meal costs, requiring strict record keeping.
Direct Purchase: The repair part purchased is recorded based on its nature. If it is a repair part consumed immediately, it is expensed. However, if regarded as a capitalizable item or inventory, it could be recorded differently.

Implication of Using Personal Credit Card

When an employee uses a personal credit card for company expenses, the amount is not initially recorded as a company expenditure. Instead, the company recognizes a liability to the employee. This liability will be cleared once the reimbursement payment is made with the company’s funds.

Supporting Documentation and Record Keeping

Required Documents

To ensure accuracy, compliance, and the ability to verify expenses during audits, maintaining detailed records and documents is essential. The following documents should be kept:

Receipts: Detailed receipts for all payments, including the repair part and meal expenses. Receipts must include the date, vendor, and amount.
Mileage Log: A comprehensive log that documents the date, starting point, destination, miles traveled, and the business purpose of the trip.
Credit Card Statements: Statements showing the transaction for the repair part payment, establishing a clear link to the expense.
Expense Reports: A compiled report submitted by the employee that itemizes all incurred expenses. The report should be reviewed, approved, and retained as an official record.
Journal Entry Records: Copies of all journal entries made in the company’s accounting system that detail the debits and credits related to these expenses.

Record Retention Policies

Besides gathering all individual documents, maintaining a systematic filing system—either digitally or physically—is recommended for small businesses. This ensures that:

Information is readily available during tax audits or financial reviews.
Historical data is accessible for future expense validations or reconciliations.
Compliance with local or federal regulations regarding record retention is achieved.

Comprehensive Example: Journal Entries and Transaction Flow

By applying the details discussed above, here is a consolidated view of the overall transaction flow from expense recording to final reimbursement:

A Detailed Walkthrough

An employee drives 300 miles, observed under the mileage log, and incurs a mileage expense of $ \text{\$0.56 per mile} $. This results in a total mileage expense of $ \text{\$168} $.
During the trip, the employee spends \$15 on a meal, which is recorded as a travel or meal expense.
The employee uses a personal credit card to pay \$100 for a repair part, with the expense recorded in the appropriate repair or supply account.
Each of these transactions is recorded with a debit to the respective expense accounts and a corresponding credit to a liability account (Employee Reimbursement Payable or Accounts Payable).
When the company disburses \$283 as reimbursement (total of mileage, meal, and part), a final journal entry is made to debit the liability account and credit the cash/bank account.

Final Bookkeeping Considerations

Consistency in applying these bookkeeping practices ensures that a small business remains compliant with regulatory standards and prepared for audits. With detailed documentation, systematic expense tracking, and accurate journal entries, business owners can handle employee reimbursements transparently and effectively. By segregating expenses into different categories, the business not only ensures proper accounting treatment but can also optimize deductions where applicable.