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Hi there,
I am currently working through my first client's books. I have recorded all sales & purchase invoices, expenses and have completed a bank rec.
However I have values to the total of almost £700 where I have no idea how the purchase was paid for. These include internet orders and shop receipts paid by card.
My client says he did use old bank accounts, now shut down and these transactions may have gone through these accounts. But without the bank statements as proof of payment.... how can I record these?
Many thanks
Kind Regards
Paula
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If the client cannot prove payment, I don't see how you can prove the purchase?
An obvious suggestion is to record the 'purchases' as drawings, and advise the client to keep better records in future; after all, HMRC suggest a minimum of six years.
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Many thanks Wilbur. You have confirmed what I was thinking.
I have now been able to trace quite a few of the transactions in question, but for the rest, your quite right - they should go to drawings.
Kind Regards
Paula
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I totally disagree with what has been siad so far. I often pay for things with cash if I'm out and about and see something my business needs. I can't see how you can justify ignoring a perfectly legitimate business expense because it is not paid for through a business account.
The invoice is the proof that the item was purchased surely? What if you are paid in cash? Can we ignore this as it doesn't show in the bank? I doubt it.
Obviously it makes it easier if everything is done through a business bank account, but it doesnt really happen in the real world. If the business owner is a sole trader and has paid for something from a personal account or cash, I would record the money as having come from capital.
I'd be happy to know others thoughts on this too.
Kris
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I agree with Kris, the receipt is the proof that the purchase was made, and if it was itemised on the receipt (which usually are nowadays) the business owner either would or wouldn't be able to justify to HMRC that it was a legitimate business expense. I only have one customer who puts absolutely everything through the bank account. If he pays cash for something he bins the receipts. I've told him he needn't do that and that I can account for business purchases made with cash, but he's not having any of it. So scared of HMRC. But he is a one-off.
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Hi Paula,
I would like to ask a question trying to get the full picture!
- How old is the bank account in question? Has your client not had any luck requesting the bank statement from the bank?
To Chris, Capital account is not an account used for the purpose of daily bookeeping. Amount appearing on drawing do get transfered to capital at year end.I am sure someone else can confirm this. The amount will eventually need to be posted to drawing account till the query get resolved. Another option is to use the suspense account.
Kind Regards,
Nathalie
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nckbookssaid:
“To Chris, Capital account is not an account used for the purpose of daily bookeeping. Amount appearing on drawing do get transfered to capital at year end.I am sure someone else can confirm this. The amount will eventually need to be posted to drawing account till the query get resolved. Another option is to use the suspense account.
Kind Regards,
Nathalie
”
Hi Nathalie,
You are partly right in that drawings will be transfered to the capital account at year end, as will profit be. But remember that any money that the business owner puts into the business from their own pocket will show in the capital account too.
I don't really understand why legitimate business expenses are being classed as drawings because they don't go through the bank account though.
Am I confused?
Kris
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Hi Kris,
Yes the first thing Paula need to do is to establish the legitimatecy of the expense. Should it proven to be legitimate the expense can be posted temporarily to drawing/Suspens account (making sure the amount does get dumped in suspens account) and journal-ed out to capital account at year end.
That is my opinion.
@Paula Pls keep us posted.
Kind Regards,
Nathalie
Edited at 28 Mar 2012 09:59 PM GMT
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Apologies... I think I may have confused some people here. Let me clarify;
I have many receipts, paid for by cash. This is not a problem and have recorded these through the books.
My issue was on all paperwork relating to internet orders, telephone orders and shop receipts paid for by card. I am not able to trace some of these debit / credit card payments through any of the bank statements provided.
Basically what I have inherited is a mess. Numerous bank accounts. Business account.... business and personal account.... saving account.... second business account, perhaps mingled with the first business account transactions also - not worked through that one yet.
Just to confuse matters, my client has went through quite a lot of bank cards! So the last 4 numbers that appear on purchase receipts and bank statements are different, frequently.
Im happy that the business bank account reconcilled okay, but the ones that have been used for business and personal transactions are not so clear.
Just to add.... One of the credit purchase invoices I put through the books said "deposit received £75, thank you"
But I couldnt find this payment through any bank statement. Upon further investigating it would seem the original £75 was paid by cheque, chq was cancelled and the full purchase invoice was cancelled (no credit note)
Hence the importance of bank rec's.
Im still working through everything and have requested yet more information.
Thanks for everyones input. The support is really helpful to me and much appreciated.
Kind Regards
Paula
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Hi all,
I have many clients who don't pay for everything via their business bank account and as long as its a justifiable expense according to the receipt I always enter it in to the accounts. If it has been paid for from the owners own pocket/bank account, it has been paid from their capital and therefore I enter through the capital account, its like they've given the business an amount of money-capital and purchases have been made from that. Whether its put through capital or credited from drawings I believe doesn't really make much difference as it is balanced off at the end of the year against each other, As long as it goes through the correct profit and loss nominal account.
Hope thats some help and my wordings not too confusing!
Karen
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- Fellow PM.Dip
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I agree mostly with what has been said on here, I too have many clients that pay for things via cash/credit cards/ other debit cards etc.
As long as it is a legitimate business expense it can be put through the books, the client will then become a creditor to his company because he is effectively owed this money back from the company.
Hope this makes sense? I'm not one for words!
Meena
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Hi Paula,
I have a client with similar issues and have therefore applied the following principles.
If there is no record on the business account and no receipt then the transaction does not go through
If there is no record on the business account or the credit card statement but there is a genuine receipt then I will record the transaction and post it to a Cash account. Every month I will offset the cash account against the directors loan Account to bring the Cash Account back to zero.
These transactions have been accepted by the clients Accountants/Auditors.
Regards
Jim
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Without being able to prove card payments on the bank statements, then the purchase cannot be proven.
Even a receipt that looks genuine; who is to say it was your own receipt? It could be a purchase made by someone else, which you put through the books as your own.
If you put through receipts just based on them appearing as legitimate business expense but there is no bank statement to prove it came out of your business or personal or credit card account - how do you prove you made the purchase?
Also - as I posed above... my client has a purchase invoice, to be paid for in installments over a year and the invoice says thank you for your deposit of £75. But this deposit was not through any of the bank accounts.... investigations showed the original deposit had been paid by chq, the chq then cancelled and the full purchase cancelled. Therefore no money had been paid and no money was due.
But it looked like a legitimate purchase invoice....
It is good to hear everyones thoughts on this.
Kind Regards
Paula
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I always set up a 'Paid personal account' or similar account for my clients and can't think of one who hasn't sometimes paid for things personally.
These things are absolutely allowable as business expenses. There is no requirement to have a business bank account, or to use it if you do have one. Having an invoice is proof enough, if you think about the VAT rules, they state that a VAT invoice must be held to claim back the VAT, not that it needs to have been paid through a bank account in the business name.
A business could look at setting up an expenses system - so items paid for personally are claimed on an expenses form, with receipts provided, and sanctioned by someone in a higher position, who is agreeing that they are genuine business expenses before authoriseing payment. But for one man band businesses that isn't approprite, necessary or beneicial - at the end of the day, if the owner is saying he has paid fpr a business expense personally we aren't here to say he is lying. Of course if there is a suggestion of fraud, that has MLR implications, but I don't think there is any suugestion that is the issue here?
It's worth pointing out that if things are paid for personally then the risk is that they will be missed off the accounts, since you don't have the check of the bank reconciliation. But that doesn't mean it's not allowed.
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I agree with Ruth, you cant legitimately exclude all expenses not paid through the bank. There needs to be some trust between the bookkeeper and client. As ruth says if you suspect fraud then report it, but you cant insist that they use their bank for everything. Personally I get charged for every transaction through my bank so I tend to use cash a lot more now. but these are still business expenses. Remember the test is whether they are wholly and exclusively for the purposes of business, not how they are paid.
Kris
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Cash transactions are not a problem.
But when something has been paid for by card and there is no proof to say it was "your" card how can this be put through the business? That opens up many MLR and fraud situations.
How do you prove an invoice has been paid... just because it has paid on it doesnt mean the chq cant be cancelled (or even bounce) or it was an invoice to your company and not someone elses purchase.
I have put through every transation that has went out of the business and the personal account. But when I have a bunch of paperwork that I'm told is paid... then I find out it is not paid, then surely the only way to prove card payments is by that persons bank statement - which ever account they have used?
Kind Regards
Paula
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I find a lot of clients are not willing to give you their personal bank statements, especially when they are directors.
The simple way to prove card transactions is to get the last four numbers of each card that your client has as this is usually shown on receipts, this way you can identify which card it has come from and it will give them peace of mind that you don't have too much of their personal information.
As for cash transactions, these are rare compared to the amount of card transactions and I don't think the HMRC will take a very hardline stance at a few cash receipts, as Kris said the HMRC is interested in whether the expense is wholly and exclusively for the business and not how it is paid.
When it starts running into the hundreds and thousands then you may have a problem. But cash paid for a £2.15 coffee is quite insignificant.
Just take a look at the circumstances, this seems to be one of those areas of bookkeeping that is not black and white, perhaps one of the fellows will indulge us with their thoughts?
Edited at 29 Mar 2012 09:28 PM GMT
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I’m not quite sure that I understand what some of you are saying. Are you saying that a company cannot have a petty cash account? Then why did I learn in my bookkeeping exams how to record transactions in it? After all, the only transaction in a petty cash account that would be visible on the bank statement is where money is transferred over to it. All other transactions, by definition, could be evidenced only by receipts.
I have never before heard such a suggestion. There appears to be some confusion here between how far a bookkeeper should go to detect fraud and what is legitimate to record in the books. If there is no particular reason to believe your client is being fraudulent and the receipts seem to be justifiable business expenses, then there can be no reason not to record them in the books. If hackles are raised under MLR or dubious expenses, that is something else. But basic bookkeeping allows for cash transactions.
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What is the purpose of a bank rec if at the end of the day we record all purchases because the seem genuine, regardless of what bank account the payment came out of... be it your clients bank or someone elses?
Kind Regards
Paula
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The purpose of bank reconciliation is not to check whether transactions are genuine. Its purpose is to check that all the transactions have been entered into the books – i.e. that your books match the bank statements. When you reconcile, you do not check where the double entries have been made (i.e. whether they are in the books as business expenses or drawings/loans). That you do on original entry. Reconciling will highlight any errors, plus you will also be able to show how the statement differs from actual income/expense for the month if there are transactions which you know about (e.g. cheques that have been drawn) which are not yet shown on the bank statement.
You cannot reconcile cash accounts. There is nothing to reconcile them against. Nor can you reconcile your client’s personal bank accounts unless you are putting all the client’s transactions through the books, no matter whether they have anything to do with the business. This would not be proper practice and nobody is suggesting you should do it.
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If you think about it another way, how do you know that the 300 miles the client claims were all business miles? Or that they really don't use that new laptop for personal use.
What if the client says they paid the invoice by cash, how do you know they really did?
I know we feel like unpaid civil servants, but I don't think we're quite at that point.....yet.
I don't shirk my responsibilities but, rightly or wrongly, I know at the end of the year its the client who will sign their tax return. If they assure me it was a business expense and it was paid then it goes through (unless its obviously not, like a fitted kitchen for their house).
If it didn't come from business funds it came from the owners funds. Therefore if it's not business money it's capital. Does it really matter which one of 15 personal cards they paid by, or if they used one of their wifes 15 cards?
Kris
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- Companion Fellow PM.Dip
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Hi
I just want to clarify something . The HM REvenue have no problem with cash receipts and I am not talking just a few.
In relation to Paula's question. The onus is on the Business owner to keep good records. If you are worried can you please contact RAY Cross in ICB. Ray is absolutely lovely and is very approachable. In the Scottish Conference quite a few members commented that they were nervous at first but told the other members they had no reason to be ,as he was lovely . I have met him and he is not a scary as his title.
As long as the element of the receipt that is been entered in the books can be proved there is absolutely no probem.
For example I do not drive and a least 8 times a week I pay taxis cash and they give me a receipt if it is for a business journey, which is very easy to prove. If I have taken cash out of the business and use it for various items I credit it against my drawing in the current year. Also if I use cash from from Personnel account for items for business . example Subsistence when travelling I also Db the expense and Credit Drawings in the Current year.
I can only speaking for Scotland here, but there are hundreds of businesses that do not except card and cash in not rare . No matter what people are led to believe. I have checked this with the HMRC.
If you use cash then you must keep a good trail. If someone pays you money by cash then you must allocate it as a customer receipt to the petty cash. You can pay for things as much as you like with cash. It is a legal tender in the UK until the UK government says otherwise.
It is certainly not un usual for busisness's like restaurants, shops and pubs to pay their suppliers by cash because of bank charges, as long as good records are kept and receipts which are proof of purchase for business. The owner can clearly demonstrate they are for business .
If you are worry about MLR then contact the ICB. But I don,t think as a body we can say that every business that uses cash is Fraudelent the HMRC are well aware of the huge Bank charges for businesses who primarlily get paid in cash like Pubs restuarants, shops and Taxis .
Though these business are classed as high Risk for MLR . But cash is the norm for some of these businesses
Edited at 30 Mar 2012 08:43 AM GMT
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Many thanks to all who replied to this post. The feedback has been very helpful.
Kind Regards
Paula
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kjmccullochsaid:
“If you think about it another way, how do you know that the 300 miles the client claims were all business miles? Or that they really don't use that new laptop for personal use.
What if the client says they paid the invoice by cash, how do you know they really did?
I know we feel like unpaid civil servants, but I don't think we're quite at that point.....yet.
I don't shirk my responsibilities but, rightly or wrongly, I know at the end of the year its the client who will sign their tax return. If they assure me it was a business expense and it was paid then it goes through (unless its obviously not, like a fitted kitchen for their house).
If it didn't come from business funds it came from the owners funds. Therefore if it's not business money it's capital. Does it really matter which one of 15 personal cards they paid by, or if they used one of their wifes 15 cards?
Kris ”
I totally agree with kris, have come across this many times over the years, and have never had a problem with HMRC.
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