Maintenance
Part of Every expense answers three questions: when, where, and whose
Expense recording patterns: six situations, six different entries
Six expense recording examples worked through with entries: a late invoice, a staff claim, a supplier deposit, a foreign purchase, a mixed use item, a credit note.
Six ordinary situations, each traced from the paperwork to the entries. None is exotic. All are places where a reasonable-looking shortcut produces a report that is wrong in a way nobody notices for months.
Every figure here is invented and chosen to divide neatly. What transfers is the shape of the entries, not the numbers.
What to take away
- In four of these six, the payment date and the cost date are different, and the payment date is never the one that decides the period.
- Money leaving the bank is not proof that a cost was incurred, and a cost can be incurred with no money moving at all.
- Where an estimate turns out wrong, correct it going forward rather than reopening a closed period.
1. The invoice that arrives after the month closed
The situation. A subcontractor worked on your site through March. Their invoice reaches you on 12 April. You expect it to be about 4,000, based on the agreed day rate and the days worked.
Late invoice: accrual and reversal
- 31 MarchAccrue 4,000 cost and liability
- 1 AprilReverse the accrual
- 12 AprilPost actual invoice 4,180
- AprilOnly 180 lands in April
The cost belongs to March, because that is when the work was consumed. Waiting for the document would put it in April, making March look better than it was and April worse.
| Date | Entry | Effect |
|---|---|---|
| 31 March | Accrue 4,000 to subcontract costs, with a matching liability | March carries the cost |
| 1 April | Reverse the accrual | April starts clean |
| 12 April | Post the actual invoice of 4,180 to subcontract costs and payables | April carries 180 |
The reversal is what makes this safe. Without it, April holds both the estimate and the invoice, and the cost is counted twice. With it, the only thing landing in April is the 180 by which the estimate was wrong. That is small, visible, and a useful measure of how good your estimates are.
Do not go back and change March. A closed period that keeps changing is not closed, and 180 is not worth the loss of that discipline.
2. An employee spent their own money
The situation. Someone buys 90 of materials for a job on 3 May using their own card, submits a claim on 20 May, and is reimbursed on 2 June.
Staff claim: cost, claim, reimbursement
- 3 MayRecord 90 materials and 90 owed
- 20 MayClaim submitted
- 2 JuneClear 90 owed, reduce bank 90
- 2 JuneNo effect on profit
There are two separate events here. Collapsing them into one is the usual error.
| Date | Entry | Effect |
|---|---|---|
| 3 May | Record 90 of materials, and 90 owed to the employee | The cost lands in May, where the job was |
| 2 June | Clear the 90 owed and reduce the bank by 90 | No effect on profit |
Recording the cost on 2 June, when the reimbursement went out, puts a May cost into June. Where claims are submitted late, this can move a material amount across a period edge. The balance owed to staff should be visible as a liability and should reconcile to the outstanding claims at any moment.
3. A deposit paid to a supplier
The situation. You pay 3,000 up front in July for equipment parts to be delivered in September, with a balance of 7,000 due on delivery.
Supplier deposit: July to September
- JulyRecord 3,000 supplier deposit asset
- JulyReduce bank by 3,000
- SeptemberRecord full 10,000 of parts
- SeptemberClear 3,000 deposit, record 7,000 payable
Nothing was consumed in July. What you bought is a claim on the supplier.
| Date | Entry | Effect |
|---|---|---|
| July | Record 3,000 as a supplier deposit, an asset, and reduce the bank | No cost in July |
| September | Record the full 10,000 of parts, clear the 3,000 deposit, and record 7,000 payable | The cost lands when the parts arrive |
Coding the July payment straight to expenses makes July look expensive and September look cheap. It also leaves nothing on the balance sheet recording that a supplier is holding 3,000 of your money. If the supplier never delivers, the second problem is the serious one.
4. A purchase in another currency
The situation. A supplier invoices 2,000 in a currency that is not yours, for goods supplied on 8 June. You pay in July. Using an invented rate of 1.25 units to yours, the cost is 1,600.
Foreign purchase: cost and currency movement
- 2,000Supplier invoice in foreign currency
- 1,600Cost recorded on 8 June
- 1,640Payment cost in July
- 40Currency movement on its own line
| Date | Entry | Effect |
|---|---|---|
| 8 June | Record 1,600 of cost and 1,600 payable, and note 2,000 in the supplier's currency | June carries the cost |
| July, settlement | The payment costs 1,640 of your currency | Payable clears at 1,600; 40 goes to a separate line |
The goods cost was fixed on 8 June and does not change after. The 40 arose from the movement between two dates. It belongs on its own line, usually below the operating result, because it describes currency, not trading.
Rolling it into materials cost makes input prices look like they moved when they did not.
Set your rate source and your convention once, write both down, and use them every time. Which convention applies to your reporting is a rules question rather than a coding one, and it follows from the method your books are kept under, described in the federal guide to accounting periods and methods.
5. A purchase that was part business, part not
The situation. A device costing 600 is bought on the business account and will be used four days a week for the business and the rest personally.
Mixed use purchase: business and private
Portion
- Business share
- Cost or asset
- Private remainder
- Drawings or owner balance
- Timing
- Decided on the day
Entry
- Business share
- Basis documented
- Private remainder
- Entity dependent
- Timing
- Not at year end
Documentation
- Business share
- Private remainder
- Timing
The split has to be decided when the transaction is entered, not at the year end, because a year-old mixed purchase cannot be reconstructed by anybody.
| Portion | Entry |
|---|---|
| Business share, on the basis you have documented | A cost of the business, or an asset if it will last beyond this year |
| The remainder | Drawings, or a balance owed by the owner, depending on your entity |
Two things are worth writing down beside the entry: the basis for the split, and the fact that you chose it on the day. Whether the split you have chosen is acceptable for tax is not a bookkeeping decision, and it is one of the questions worth batching for an accountant.
The federal guide to business expense resources is where the current position on mixed-use costs is set out. The wider point about separating the owner from the business is covered in the expense recording guide.
6. A credit note for part of a delivery
The situation. You recorded 1,200 of stock in August. In September you return a quarter of it as faulty and the supplier issues a credit note for 300.
Credit note: August purchase, September return
- AugustRecord 1,200 stock and payable
- SeptemberReturn a quarter as faulty
- SeptemberCredit note 300 reduces cost and payable
- BothOriginal invoice and credit note shown
| Date | Entry | Effect |
|---|---|---|
| August | 1,200 of cost, 1,200 payable | August is correct on the evidence held at the time |
| September | Reduce the cost account by 300 and the payable by 300 | The credit note carries its own date and number |
Do not edit the August entry. The original invoice and the credit note are two documents with two dates, and the books should show both. Where the return relates to stock rather than a consumed cost, the reduction reverses the same account the purchase went to, so that the effect is visible in the same line that carried the original.
What these six have in common
In every case the question was the same: what happened, when did it happen, and what proves it. The bank line answered none of those.
A payment cannot be trusted to code itself. It can be a cost, an asset, settlement of something already recorded, money owed to a person, or a movement between your own accounts. Only the document tells them apart.
Read the document, not the amount. The errors that follow from doing the reverse are listed in the mistakes that damage a small set of books.
