In a Sole Proprietor business with no employees, what is the preferred way to record Billable Expenses paid by the owner on behalf of a Customer?
Is it:
via an Expense Claim payable to the owner with a subsequent Journal Entry to transfer the amount to Owner’s Equity, or
by a direct Spend Money transaction from a Cash account, or
via an Expense Claim that is subsequently settled with a Spend Money transaction, or
some other way?
And should these be cleared at the end of each year, or more frequently?
I’ve seen a number of postings on this topic, but nothing entirely definitive that describes the preferred end-to-end process. @Tut, I’d especially like to hear your thoughts on this.
There could be several potential workflows. Here is how I do exactly what you are asking about:
Create an expense claim. Do this any time you spend personal funds on company business. Allocate the claim to Billable expenses and the customer’s subaccount. The claim is debited to the Billable expenses asset account and credited to the Expense claims liability account. Notice this has no effect on any expense account, because you are not spending money on behalf of the company, but rather on behalf of the customer.
Invoice the expense to the customer from the Uninvoiced column of the Customers tab. The amount will now be transferred to Accounts receivable.
Clear the Expense claims liability account to Owner's equity periodically with a journal entry. (I do it on the last day of every month.) Debit Expense claims and credit Owner's equity. This action turns your purchase for the customer into an equivalent contribution of capital. There is no magical time frame for doing this, but I would not like to be printing year-end reports with that outstanding liability.
In doing this, note that I do not use capital accounts, because as a sole owner, all equity is mine. But that means I had to create myself as an Expense Claim Payer.
Also note that, if I wanted to, I could actually reimburse the claim rather than clear it to equity. To do that, use Spend Money and allocate the expenditure to Expense claims. The only time I’ve done that was to reduce cash on hand after a customer paid in cash.
This is where it falls apart for me. When I create the proper Journal Entry for this, I can see that my Expense Claims liability account falls to zero, as it should.
Ideally, just as the Customers screen keeps track of unbilled hours and unpaid invoices for each customer, the Expense Claims screen should keep track of unpaid expense claims for each expense claim payer. How else do I keep track of how much I owe each payer? (I can use the Search box on the Expense Claims screen to list all of the claims for a particular payer, but I have to total them manually and I have to somehow know which claims have already been cleared and which ones have not.)
This screen is merely a listing expense claims, not an account balance, just as clicking on the Billable Time or Billable Expenses tabs lists category entries, but does not give account balance.
This is because you are drilling down on a balance and can see everything that contributes to it. This is a design philosophy followed uniformly throughout Manager.
All that said, I see your points:
There is no quick way of knowing whether an expense claim has been paid or cleared.
There is no way of knowing how much of the Expense claims account aggregate is attributable to any individual Payer. Even if you sort for the Payer name, there is no total. So you must resort to offline arithmetic.
This is an area where improvements are certainly possible. Longer-time users, though, were happy to see this module appear at all. And since you’ve told us you are a solo practitioner, you shouldn’t have much confusion about how much you owe yourself.
I assume you are talking about a “cash” payment here.
While there is nothing wrong with @tut suggestion I think there is a cleaner and simpler way.
Create a Petty Cash Float - then all those sort of transactions are treated normally within the business without needing expense claims, journal entries and adjustments to equity etc.
Activate the Cash on Hand TAB and then create a Petty Cash Float account.
Cash a check at the bank for $X - use the transfer money when processing the check
When ever you need those funds, just process the payment via the Petty Cash Float account
When ever the float gets a bit low, Cash another check to bring the float back to its $X value.
If the Float gets low to often just $X to $Y total
I agree with @Brucanna that a little petty cash is frequently useful. But for rigorous accounting, only the company should be able to spend that cash, not an individual. If individuals are spending their own money on company expenses, your are right back to Expense Claims.
The right use of petty cash is a situation such as someone going to the post office to mail an invoice. Rather than write a check or send a company credit card, you give cash to the courier and they bring back the receipt so the cashbox is always in proper balance.
Companies can’t spend the cash without there being an individual involved unless you have robots.
The whole point is, individuals won’t need to use their own money because the Petty Cash is available.
You have two cash payments - the planned and the unplanned
The planned - you take $a from the petty cash and make the purchase returning any change and receipt.
The unplanned - you take the receipt back to the Petty Cash and swap it for reimbursement - just as though you had taken the cash in the first place.
The rigors of accounting are satisfied by having the Petty Cash Float reconciling with the Petty Cash Float account - no different to any other reconcilable account.
I have worked with multi-national audited companies and they have used the exact same system without any difficulties - in one case you had to fill out a petty cash chit (name, reason for purchase, cost centre to be charged) and attached it to the receipt.
Individual’s Expenses Claims were for non-cash payments or employees not located at offices i.e. cash points
Lastly - @Jon wrote “Sole Proprietor business with no employees”, so lets keep the systems & procedures in proportion
