I don’t want to get into theory but a billable expense is a direct expense attributable to a customer, job or a project which hasn’t been invoiced. This is done for better matching of revenues to expenses because if an expense was not invoiced it should sit in “assets” rather than “expenses” where it would distort profitability.
Having said that, this is totally besides the point so let’s not go there again.
As far as the legal and economic substance of a transaction, I should not record as an expense of any kind or otherwise any purchase invoice addressed to other people since it is not mine. Also, I should not invoice other people with thing I have not done.
If I purchased the expense and a supplier addressed his invoice to me then I must record such invoice as mine and then recharge it to my clients. My invoice makes my customer liable for something he wasn’t, hence its economic substance. I “owned” whatever items/services/expenses in the invoice at least for a short period of time and hence its legal substance. I am happy, customers are happy and both our auditors are happy
The case you suggest, someone X charges my customer Z directly, I pay the invoice which is not mine using funds that I do not own, reinvoice Z with the services that he already recorded as a liability. Let’s see what’s wrong here:
- The cusromer has already recorded the liability from X’s invoice to him, my invoice gives 0 rises to any new liabilities, in fact it is double billing of the same amount X has billed since the they have the same underlying items/services/expenses. No economic substance to this invoice.
- I never was liable to X with any amount, legally not my expense … I still record it, then I invoice my client with items/services/expense that I never owned at any point in time. No legal substance to this invoice.
- If my issued invoice has no economic or legal subatance of an invoice, why would I call it an invoice? In fact there is a name for a document that tells other people that they owe you or that you owe them less without satisfying the economic and legal requirements of an invoice, it is called “Debit Note.”
- End result, I am not happy with the convoluted and excessive work flow, customer wants to know why is he billed twice and auditors are triggered at every step of the way.
I do not intend to change the business conventions in Bahrain nor do intend to change the views of my customers and auditors. I just want to raise debit notes to customers and record debit notes from suppliers and be able to apply them according to the legal agreement between us and our customers/suppliers.