Reimbursement is money that is paid by an organization to cover a transaction that has already been made. Put simply, it is money paid to an employee, customer, or another party as a repayment for a business expense they have paid out of their own pocket.
Common examples of reimbursement are business expenses, insurance costs, and overpaid taxes (although reimbursement is not subject to taxation).
Understanding Reimbursement
When you think of reimbursement, you probably think of being reimbursed for a business expense. So let’s say you attended a meeting and purchased a train ticket yourself, you would submit that expense, along with the receipt, and your company would reimburse you the cost of that ticket.
Most companies have reimbursement policies that detail what is and is not covered for out-of-pocket expenses and they are generally related to travel including hotel costs, food, transportation, and flights.
Your company might also reimburse you for other costs such as home office equipment, online or local college courses, or work-related training.
Types of Reimbursement
Insurance
In the insurance, industry reimbursement is common because if the policyholder needs urgent medical care they most likely do not have the time to contact the insurer first. They would pay for the medication or any medical services they need out-of-pocket and then get reimbursed according to their insurance policy later.
Taxes
Taxes that are paid to the state and federal government are also commonly reimbursed. The majority of income taxpayers pay an estimated amount of tax each pay period and this doesn’t always include the tax credits they may be entitled to. For cases like this, a tax refund will be made to the taxpayer from the government – which is a form of reimbursement.
Legal
Reimbursement alimony is used in the legal sector when a judge orders that payment be made to an ex-spouse as reimbursement for the time and money invested into the spouse’s career and financial prospects.
So let’s say a woman worked full time to support her husband who was attending college to get his MBA. If they were to divorce, she might be entitled to reimbursement alimony as compensation for helping her former husband to learn a new skill and increase his earning potential.
Reimbursement Requirements
Companies in the US can use the per diem supplied by the General Services Administration (GSA) to work out a suitable daily allowance to cover employee costs incurred on a business trip. There are various reimbursement rates for different cities and states.
However, the company can also choose to set its own per-diem rates by using the GSA rate as a base point and adjusting it by factoring in specific company considerations.
One example of this might be salespeople who may need to entertain clients. It would make sense to increase the reimbursement rate to allow them to properly entertain the client and secure or retain their business.
Any business, insurer, or government, will want to make sure reimbursements are provided for legitimate reasons only. This is why HR departments often develop processes to examine potentially fraudulent requests. For example, always requiring a receipt for transactions to prevent employees from filing an expense that never happened, or inflating its value of it.
Reimbursement Example
James is a sales director for a craft beer company that produces beer for the retail market and he often spends time on the road speaking with vendors and potential clients.
The company usually pays for his travel expenses upfront but a colleague was sick and he had to take their place on a trip to meet a vendor at the last minute. This meant he had to pay for his travel, hotel, and food, which cost him $854.
He collects all of the receipts for the business expenses and files them with the company. This is a legitimate reimbursement claim because he has already paid the transactions and now needs to be repaid that money.
FAQs
1. What is reimbursement?
Reimbursement is when an individual or company pays back an expense that has already been incurred. This can be done through a variety of methods, such as insurance, taxes, or legal payments.
2. How do you record reimbursement in accounting?
When a company reimburses an employee for expenses they have incurred while doing their job, the accounting is usually done as a credit to Accounts Payable. This means that the money has not yet been paid out by the company, but the liability will be recorded in case it needs to be paid in the future.
3. Why is reimbursement important?
Reimbursement is important because it ensures that individuals or companies are not out of pocket for expenses that have already been incurred. This can be vitally important in cases such as insurance, where claims may need to be made for damages or health costs.
Furthermore, reimbursement can also help to motivate employees by providing them with a way to be reimbursed for the costs they incur while doing their job. This can be especially important in cases where employees are required to travel for work.
4. Is reimbursement an expense or income?
Reimbursement is not an expense or income, but it is a method of payment. This means that it can be recorded as either an expense or income, depending on the context in which it is used.
5. What are some common methods of reimbursement?
Some common methods of reimbursement include insurance, taxes, and legal payments. Each of these has its advantages and disadvantages, which need to be taken into account when reimbursing employees or companies.
