Closing the expense side: department spend, budget and burn
The expense close checklist, spend by department as a dimension against the budget, and net burn with the one-offs named, on Northwind's Q4.
Everything so far puts a cost in the right month with the right proof. The last job is to look at it. Once a month the expense side of the close has to answer three questions: is everything booked and coded, where did the money go by department, and what did the quarter burn? Northwind's Q4 is the example.
Step 1: Clear the feed
Every card line matched to a receipt and coded; the feed has no unreviewed lines left.
Step 2: Book the reimbursements
Reports submitted by the deadline are approved and booked; late ones are estimated.
Step 3: Cut off
Unbooked costs incurred in the month are accrued; costs booked early are moved out.
Step 4: Release the prepaids
Contracts and insurance released; the prepaid account ties to its schedules.
Step 5: Review capitalization
Anything at or over the threshold is on the asset register, with freight in its cost.
Step 6: Tie the payables
Credit card payable agrees to the statement, reimbursements payable to the unpaid reports.
Step 7: Assign every line
No spend left without a department.
Step 8: Review the variances
Actual against budget, with a written reason for the lines that moved.
Release the contract and depreciate the jack
| Account | Debit | Credit |
|---|---|---|
| 6800Software expense | 200.00 | |
| Depreciation expense, equipment | 38.28 | |
| 1410Prepaid software | 200.00 | |
| Accumulated depreciation, equipment | 38.28 | |
| Balanced | 238.28 | 238.28 |
November's expense-side month-end entry: the annual contract released and the pallet jack depreciated.
A department is a dimension
A department or team that incurs costs and earns no revenue of its own is a cost center. In the books it is a dimension on each line, not another set of accounts: the account says what was bought (software, travel), the dimension says who it was for. The same hosting charge can be Operations in October and Sales in November without touching the chart of accounts.
Q4's spend came through three doors: vendor bills, the company card and reimbursements. By department it totals $44,275, of which $15,585 was on the card. $1,275 of it has no department.
A line needs a written explanation only when it moves by at least $500 and at least 10% of its budget. A large line that moved a little and a small line that moved a lot are both left alone, and a line with no budget is flagged on the amount, because unbudgeted spend is what the review is for. The variance lesson builds the full report; the rule is the same. A cost above its budget is unfavorable, which is why the sign of the variance is arithmetic and the label is a judgment.
What the quarter burned
Gross burn is all cash out; net burn is cash out less cash in. Q4 paid out $74,655: the department spend, $25,200 of payroll from the payroll book, and two one-offs that will not repeat at this size. $48,000 came in (an assumption), so the quarter's net burn was $26,655, or $8,885 a month. Take the one-offs out, naming them, and a normal month burns $7,158.33.
Read the two figures together. The first is what the bank saw and what the cash balance fell by. The second is what a normal month looks like once a year of a contract and a racking add-on are set aside. The burn lesson turns either into runway; dividing cash by the first understates how long it lasts, and by the second ignores that the one-offs happened.
Expense analytics are only as good as the coding: a department on every line, a basis on every figure, and the one-offs named.
Finished this lesson?
Where this lesson's rules come from
The sources behind this lesson's requirements, by kind. Anything marked as a convention is ours, not the rule-maker's.
- Conceptual framework
- CON 8, Introduction — as amended by Ch. 4, App. A (carrying forward CON 6, ¶139) (opens in a new tab)What accrual accounting is forFree to read
The full map is in US GAAP, and where these rules come from.
The words this lesson teaches
Each links to its glossary definition, which also names the authority behind it and the components that render it.
- Cost centerA unit — a department, a team, a location — that incurs costs but earns no revenue of its own, and to which those costs are charged. It is a dimension on the entry, not a separate accountConvention
- DimensionA non-account axis: entity, department, projectConvention
- BudgetThe plan for a period, line by line, approved before the period starts and held fixed while it runs, so actual results can be measured against it. Built on the same basis as the books — an accrual budget for accrual books — or every variance is partly a basis differenceConvention
- VarianceActual less budget (or forecast) for one line, labeled favorable or unfavorable by the line's polarity: revenue above plan is favorable, a cost above plan is not. The sign is arithmetic; the label is the findingConvention
- Operating expensesThe costs of running the business other than the direct costs of revenue — selling, general and administrative, and research and development. They sit between gross profit and operating income
- Gross burnGross burn is a cash and runway metric, calculated as All cash out in the month, before any cash in.Convention
- Net burnNet burn is a cash and runway metric, calculated as Gross burn − cash in, excluding financing inflows.
- Flux analysisExplaining period-over-period variancesConvention
In the founder glossary
This lesson’s ideas, explained for the founder running the company. Each has an entry in the founder glossary.
See also
- Periods & the closeThe month-end close in accounting software: fiscal calendars, period states, cutoff, reconciliation vs tie-out, adjusting entries and restatement.
- Metric definitionsEvery metric in this system ships with its formula, period, inputs and source. A KPI without a definition is a number people argue about in meetings.
- Software spend per employeeTotal software spend turned into a yearly figure, a cost per person and a share of revenue, with what a trim is worth.
- Gross burn vs net burnGross burn is all the cash a company spends in a month. Net burn subtracts the cash it collects, and runway is computed from net burn.
- Burn rate and runway: how to calculate them correctlyGross burn, net burn and months of runway, done the way an investor checks them: from cash, averaged, and with the hires you’ve already committed to.
- Why startups should close their books every monthA monthly close turns a bank balance into numbers an investor, an auditor or a 409A firm will accept. What it is, and why it gets expensive to skip.
- CutoffThe line between one period and the next. Revenue and expenses land in the month they belong to, especially transactions dated just either side of month end.
- BudgetVsActualPolarity-aware, materiality-filtered, versions tracked.
- PlByDimensionThe P&L cut by department, entity or product.
- DimensionPickerEntity always required; renders what the account demands.
- ExpenseTrackerSpend by category on three bases, with polarity derived per row.