I have a business, I requested to create an invoice for a freelancer friend to help him collect the money from his client. the given invoice has a VAT amount that should be declared, After he collected the amount I provided him with receipt of the full amount. in fact, he just paid me the VAT amount only as he owned the remaining invoice amount. the invoice shows as paid but in actual there where no money flowed to the cash account.
my question is:
How to close this invoice payment properly, or detect the invoice amount from the cash except the VAT amount?
If I understand correctly what you did, you should not have done it. You cannot enter a sales invoice for someone else in your accounting records. Your records will forever be wrong. This can be considered fraud.
Your description of providing a receipt is incomprehensible. Whatever you and your friend did with VAT was probably against the law. This question is not about Manager. You need to consult a local accountant, and possibly an attorney, to see how to get yourself out of this situation with minimal penalty.
Dear you went so far explaining my post, there were no low fraud, I can hire any outsource employees to do any kind of service while iam legal and have the full responsibility in front of the client with full acknowledge and paying my tax, else i would not ask here!
Also my the same person is a partner with me in other project and i already created an partner ship account to record his share profits.
only the different in this situation that I want to move this receipt amount from the cash account to his capital account then at the same journal entry detect that amount as drawing. so the amount went inside cash and moved to the capital account then draw it, unfortunately, even after doing the drawing entry his equity account still the same never changed! and his equity account still credited with the invoice amount (which he already cashed earlier).
at the end of our shared project I will cash him all his shared profit from the Retained earnings including the invoice amount.
this is all the story, if you have proper adjusting, or high light me if I did miss-configuration to my account tree, dont bother your self of my legal situation.
thanks
I am sorry, but I understand even less now.
If i understand correctly the transaction has been made as below
- invoice amount u have received $115 (100+VAT15)
- You have paid to your friend net $100
- Rest VAT amount you are showing in your accounts as VAT
is it correct? if yes, then you need to create a VAT payable account under Current Liability.
then clear your invoice as your normal process then insert new row and select VAT Payable. After that mentioned VAT amount with Minus-(Negative). i think it will solved if i picked up correctly.
Thanks
From what I understood, his friend (A) couldn’t perform a service to a Client (B) so @Bu_Hamdan took the job and then subcontracted it to A.
Since @Bu_Hamdan is tax registered and A isn’t, @Bu_Hamdan gave A the entire sales amount but kept the VAT.
In that situation, you already have your sales invoice. You also need to:
- Create Purchase Invoice from supplier A for untaxed amount.
- Issue a receipt from B just for the VAT amount.
- Follow this guide to offset the remaining sales and purchase invoices.
Thanks subrosumon
thanks Ealfardan
For replying.
this is what I did please correct me
- I created a sale invoice for the client and it shouldn’t be removed from the sales invoices because it connected with tax and also I added the tax to the tax payable. (now i have in my hand $15 only the $100 already cashed in my friend hand ).
- my friend has an account with me as he and I are a partner in another project, and he has an prfit share account where he used to track his profit from the project).
- I created a journal entry to move the full invoice amount ($115) to his partnership capital account.
- In the same journal entry I added one more transaction to detect the VAT amount ($15) back to the Retained earnings.
the $100 not exist anymore in my retained earnings and exists only on his capital account (sub-account shared profit).
the $100 that shows in his profit share account is not real as he already cashed it before so It makes confusion when I cash him all his shared profit, which means this will drive me to pay him an extra $100 from my Retained earnings.
what is the best way to remove it from his shared-profit account without effect the expense accounts?
I tried to create a drawing entry against his account but the amount still the same!
It’s a little bit confusing.
in this case-
For Invoice:
Sales Credit $100
VAT Payable Credit $15
Accounts Receivable Debit $115
Invoice clear:
Accounts Receivable Credit $115
Business Bank Debit $100
VAT Paid Debit $15
Now you required
Journal/Payment to friend:
Business Bank credit $100
Friends Account debit $100
When you calculate profit sharing/ received and it will recorded how much he has received already from from business,(withdrawn)
If you want to show all of them through project wise, you should use Tracking Code to identified closely by project.
Of course it is clearly fraud. It’s illegal to invoice a service not delivered by yourself or your co. The person who performed the service avoids income tax and the OP could cancel this income/profit against possibly available losses, hence a second illegal act. I really don’t understand why you didn’t close this topic. Just my 2 cts.
i am not thinking that is fraud, if the contract agreement is state the received to be other account on behalf of service provider and it should be legal if contract agreement is approved by both party.
I don’t know about the contract agreement.
Yes you can when you are acting as their agent. Management companies do sales invoices on behalf of their clients (actors, musicians) all the time. It is just that the sales invoices get posted to a BS Liability > Trust Account and not a P&L revenue account.
In the above example, @Bu_Hamdan was acting as the management company on behalf of the freelancer. It is irrelevant if that person was a friend or not, that information just polluted the waters.
You are absolutely correct, but in this case, as you have no earnings within the transaction, the sales invoice should be posted to a BS Liability > Trust Account.
Sales Invoice
Dr Accounts Receivable $115.00
Cr Trust Acct $100.00
Cr VAT Payable $15.00
Then when he pays you the VAT amount only the receipt is
Dr Bank $15.00
Dr Trust Acct $100.00
Cr Accounts Receivable $115.00
Now there is no need for any adjustments to any capital or retained earnings accounts as the Accounts Receivable and Trust accounts have been cleared. However, in saying that, you could use the capital account instead of a trust account to avoid creating a single use account.
Subsequently the VAT Payable will be cleared with the next VAT return.
There is no fraud involved. The transaction is clearly being declared in a set of accounts and VAT is being paid. It is presumptuous of you to assume that the freelancer isn’t going to declare those earnings within their own income tax. Furthermore, there isn’t any income/profit considerations as all transactions should only be occurring within the BS.