Reimbursement is the payment that company pays to staff, customer and other parties to settle the expenses that they have paid on behalf of the entity. These parties use their own cash to pay for company expense and then they reimburse back. They are usually the miscellaneous expense that has low risk so they are not required to have approval before making payment.
Reimbursement expense is also the additional cash paid to staff due to overpayment. It happens when staff advances cash but it less than the actual expense.
For example, Mr. John has an oversea mission for a week. He had advanced cash $ 5,000 for the total expense include food and hotel. However, at the end of the week, he had spent up to $ 6,000 for all expenses.
When he arrives at the office, he prepares the supporting invoice to clear advance of $ 5,000 and reimburse an additional $ 1,000 which is paid by his own money.
Reimbursement Journal entries
To record the advance entries:
To record the reimbursement
Note: We may separate the expense into travel expense, accommodation expense, per diem and so on. We ignore expense classification in this example to simplify the concept for you.
There are so many kinds of reimbursement, however, we can divide them into three main categories as following
They are the expense reimbursement intent to supporting the business operation. Due to various reasons, the employees pay to supplier and reimburse from company. The employees paid for expense while working for company and there must a connection to business activities. These kinds of reimbursement include:
- Training expense
- Office supplies
- Business Traveling
- Other small expenses which usually paid by petty cash
All of these expenses must be record within a proper accounting period. The employee must reimburse to company as soon as possible after completing the transactions. The payment must attach with proper supporting documents.
Employees may find themselves travel for business purpose and for sure they may spend their money first and reimburse back later. The expenses are different from company to company due to the internal policy.
The expense may include travel expense and per diem. The traveling is the actual expense for plan, bus or taxi. The company will reimburse base on the actual invoices. For the per diem, the company use the fixed rate per day and paid to employee.
The last type is medical reimbursement, it happens when employee go to visit the doctor and claim back from company. It is not practical to get approval on the bill, so employee use their own money and reimburse from company later.
Reimbursement contract or cost-reimbursement contract is the agreement between government and the contractor. They use this type of contract due to the cost is unknown, i.e material, labor, and equipment. So the government agrees to reimburse the exact amount which the subcontractor paid.
The contract usually the fixed price, however, it is very difficult or even impossible to estimate the total cost over contract period. So government agree to use cost reimbursement contract in order minimize the risk for both parties. In here, the final price will be determined by the actual cost when contract finish.
Reimbursement grant provide fund to the recipient after the expense already incurred and paid. The recipient must conduct the activities up frond and reimburse cash back later. It is such a risk if the reimbursement process take longer than expected. However, the grantee must aware of this issue and they must have strong financial position otherwise they are not capable of this kind of grant.
Reimbursement invoice is the supporting document which the company or employer use to pay the expense which are paid by their staffs. The staffs are required to complete this form in order to get back their money. And they must complete it within a specific period after the transactions date. The time can be different due to company policy.
In some companies, they use the reimbursement form which serve the same purpose and the format is not much different.
Risk of reimbursement expense.
- Expenses over the budgets: Without getting approval from management, there is a risk that the expense over company budget.
- Expense not meet company requirement: Some expenses are not comply with company policy as the supplier can’t issue proper invoice.
- Expense not related to business operation. During business travel, employee may use their own money first and expect to claim back later. However, some expenses during the trip are not related to business activities. For example, company allows reimbursing the dinner and lunch. But they will not include some expenses such as wine, beer, and other entertainment expenses even it occurs during the trip.
- Fail to get business rate. When employee uses their own money to pay for the expense, the supplier will offer a normal rate which usually higher than the corporate rate. If we use the company name, we may be able to save some cost due to the corporate rate.
In order to improve the process within the company, we need to have proper standard procedure.
- Make reimbursement policy: The policy should state clearly the type of expenses which are able to reimburse and the condition of payment. It must include the level of authorization, timeframe of submitting form, and the limited amount.
- Submitting reimbursement form: The form should be filled and submit by employees to HR department for review and approved. The form must be initial by the direct management and state clearly about purpose. The form should be submit within one or two weeks after completing transactions. It will ensure that we have enough time to process and pay employees on time.
- Verify Expense: The authorized person must review all expenses to ensure they comply with policy. All expenses must bring benefits to company not related to personal expenses. If there are any doubt, we need to questions employees and their management.
- Pay reimbursement: it should be done by bank transfer or cheque in order to reduce the risk. However, some companies still use petty cash for small reimbursement by asking the staff to sign receive on the forms.
Reimbursement without receipt
What should we do if the employee reimburse expenses without receipt? It depends. Some companies require no receipt for a small expense (i.e below 10$).
If the employee lost receipts for amount over the limit, they may require to prepare request letter with approval from their manager. The letter must attach with following document:
- A Copy of credit card statement which show the exact amount
- A copy of receipt from supplier if possible
- A detail list of expense with specific purpose
- A proper reasons which lead to lost of receipts