Refund vs Reimbursement: Where is the Difference?

what is meaning of reimbursement

The “refund vs reimbursement” question makes everybody puzzle about the basic concept. Although there is a difference between these two, the concepts also have something in common, which can make an accountant confused. 

It doesn’t matter how many people work in the company, or what niche your business occupies in the market. Sooner or later, you will be faced with the issue of reimbursing your employees’ expenses. Business conferences, meetings include flight and hotel expenses. Add here the cost of digital tools and software that your employees use, and get the necessity to track and compensate the expenses.

It is very important to maintain control of your finances through accurate accounting, budgeting, and tracking spending habits. But the process can result in wasted time and resources, in case you as an accountant don’t pay attention to the basic rules.

Let’s have a more detailed look at the “refund vs reimbursement” question.

  1. What is the Meaning of Reimbursement?
  2. Why Reimbursement is Necessary?
  3. What is a Reimbursement Account?
  4. What is a Refund?
  5. Conclusion

What is the Meaning of Reimbursement?

The reimbursement of business expenses refers to the act of compensating your employee for the amount of money he spent out of his pocket. Businesses, governments, and non-profit organizations may compensate their officers and employees for reasonable and necessary expenses. The payer may also be reimbursed for supply, daycare, mobile, medical, or educational expenses. Moreover, a lot of companies reimburse their employees spending on home office, equipment, and even tuition.

Why Reimbursement is Necessary?

Reimbursements are necessary when an employee pays for specific business expenses. Normally, a company would do this for its employees if they have incurred personal expenses at the time that they paid for with their own money. Following their submission of receipts to the appropriate accounting department or person, workers can then request compensation.

Many companies give their employees a certain amount of money per diem that can be spent on specific expenses to keep reimbursements to a minimum. Organizations also provide reimbursements in advance to cover future expenses. Nowadays most modern companies have gone paperless and use expense tracking apps. Actually, the Expense Sensei app is a leader in the market of business expense trackers. This app has eased up the whole reimbursing process for the organizations through which they can handle the expenses of their employees. It provides facilities to the employees and the managers. Employees can submit expenses and get reimbursement faster than usual. The managers can collect expense reports, approve them and keep a record of these payments.

What is a Reimbursement Account?

Nowadays many companies raise reimbursement accounts for their employees if they already hold a salary account at a bank. Those who already have an account with the bank should mention their payroll account number and debit card number on the account opening documents so that their payroll account will be linked to their reimbursement account.

Direct credit to the reimbursement account can be requested after this. Usually, there is no maintenance fee or minimum balance requirement on this account, since it is a Current Account with no balance. It will make reconciliation convenient for both the organization and the employees. This account is linked to the primary Salary Account. 

A prepaid debit card can be used to access both the salary account and reimbursement account using the same ATM/debit card. This account can be used to route various reimbursements to employees other than salaries. One can choose either their salary or reimbursement account when withdrawing cash from an ATM.

Due to its nature as a current account, reimbursement is not interest-bearing. Reimbursement account balances do not earn interest.

What is a Refund?

It’s not a secret that in the market of business expense tracking software even accountants with years of experience sometimes use the word “refund” when talking about employees reimbursement. This is not a gross mistake, but it indicates your professionalism and the use of the correct word will not mislead employees who will read the policy.

In a refund, a customer is paid back for goods or services that they are not satisfied with. There are many reasons why a refund might be needed. After making the purchase, the customer changed their mind or the product was not what they ordered. Further, the product that they ordered was the wrong one, and they intended to order something else. You usually get back the amount you spent from the seller.

A customer may either receive back their money, receive a replacement item, or receive a voucher in exchange for their money. In the case of simply returning the money, we use the term ‘cash refund.’ The term ‘refund’, however, has a connotation that refers to simply giving customers their money back. You didn’t pay someone else’s taxes instead of the money you received from the IRS – You were the one responsible for paying those taxes. You paid too much, so you got a refund.

Conclusion

Refund is all about the money that you have spent on yourself or on something that belongs to you and now you want that money back in exchange for the thing you just bought. However, reimbursement is something that you did for some organization or some individual and now you want your money back from them. Overall, reimbursement is linked with your money being spent on others for official purposes and a refund is something that is you spend on yourself. Both of these transactions are necessary if the companies want to carry on their businesses smoothly.