Bills, expenses and the documents behind them

Two kinds of outgoing

Money leaving a business arrives in two shapes, and ByteBook keeps them apart:

• A bill. An invoice from a supplier, with a due date, that you will pay later. Record it under Bills to pay. Until it is paid it sits in creditors.
• An expense paid now. Money that has already left the bank. Usually you meet these while coding the bank statement, in chapter 7.

Both end up in the same place: an expense in the profit and loss report, and a GST credit if the purchase carried GST.

Record a bill

1. Go to Bills to pay → New bill.
2. Choose the supplier. Add the supplier's GST number to the contact if it is missing. It is needed on their tax invoice, and ByteBook's documents procedure reports the ones that do not have it.
3. Enter the lines, and mark whether the amounts include GST.
4. Save. The bill is now in creditors, and the expense is in the books.
5. Pay it when the money leaves, from the bill itself, so the payment and the bill stay linked.

The document, not just the number

For a bookkeeping record to be worth anything, each figure has to be traceable to the document behind it. Inland Revenue's rule is practical: a tax invoice for more than $50 has to show the supplier's GST number, among other things. ByteBook's documents procedure checks for that and reports the documents that have something missing.

An auditor's version of the same question is in the auditing standard on audit evidence: the auditor designs and performs procedures that are appropriate in the circumstances for obtaining sufficient appropriate audit evidence ISA (NZ) 500.6, and considers the relevance and reliability of the information used as evidence ISA (NZ) 500.7. A supplier's own tax invoice is stronger evidence than a note in a diary.

Getting the expense in the right period

An expense belongs in the period the business consumed whatever it paid for, not the period the money left the bank. Two common cases:

• A bill received in March for February's electricity. It is a March transaction if that is when it was incurred. Post it with the right date.
• A payment in April for a service covering April to June. Part of it belongs in a later period. That part is a prepayment.

If a figure is found to be wrong after the financial statements were issued, material prior period errors are corrected retrospectively NZ IAS 8.42. If the business changed an estimate — how long a machine will last, for instance — the effect is recognised prospectively, in this period and later ones NZ IAS 8.36. An error and a change in estimate are different things, and they are accounted for differently, which is why the distinction is worth learning early.

Expenses an auditor looks at twice

The expenses procedure in ByteBook is deliberately blunt. It reports the three patterns where an expense account is most often wrong:

• Round numbers. A $1,000 payment described as "sundry" is a question, not an answer.
• Large one-off costs. Above about $1,000, the question is whether it was an expense at all, or something the business now owns. An item of property, plant and equipment that qualifies for recognition is measured at its cost NZ IAS 16.15, and depreciation begins when it is available for use NZ IAS 16.55, not when it was paid for.
• Costs that look personal. These matter for two reasons: they may not be deductible, and if the owner took value out of the company this way, the transaction may be with a related party.

Related parties

A small company's transactions with its owners and their other businesses are related party transactions, and they get special attention because they are where the interests of the business and the interests of an individual can diverge. An auditor is required to inquire of management about the identity of the entity's related parties, including changes from the prior period, and about the nature of the relationships and transactions ISA (NZ) 550.13.

In practice: if the business paid money to a person or a company connected with the owner, say so, and keep the paperwork.