Managing expenses and revenue

Revenue: where it comes from and how it is recorded

Revenue is recorded when earned (the invoice issued or the service delivered), not when collected. The e-invoice is the primary revenue document, posting to revenue, receivables and output VAT. Other income (rent from a company property, interest, sale of an asset) goes to separate accounts so it does not mix with core revenue and distort the margin.

Expenses: classification first

• Cost of sales: whatever relates directly to what you sell (goods, materials, direct labour).
• Operating expenses: administrative salaries, rent, utilities, telecoms, marketing.
• Financial expenses: bank fees, loan interest.
• Not expenses: buying equipment or a car (a fixed asset that depreciates), repaying a loan (reducing a liability), and an owner’s drawing (reducing equity).

A document for every expense

An expense without a valid tax invoice costs you twice: you cannot deduct its input VAT, and you cannot prove it to the auditor. Make it the rule: a photo of the receipt or invoice attached to every expense from the phone at the moment it is paid, not at month end from an employee’s memory.

Petty cash and employee claims

Petty cash is an amount handed to an employee to spend from; it is recorded as a receivable from them until they present spending documents, when it converts to expenses. An expense claim is an amount the employee paid from their own pocket and asks to have reimbursed; it goes through approval then payment. In a good system the employee submits the claim from the app with attachments, their manager approves it, and it reaches accounting as an expense ready to pay.

Recurring templates

Rent, subscriptions, insurance and fixed salaries recur monthly. A recurring template generates the expense (or the invoice for recurring revenue) on schedule automatically, so nothing is forgotten or recorded twice. That is what makes the monthly income statement genuinely comparable, rather than distorted by a month in which the rent was forgotten.

VAT on expenses

Input VAT on business expenses is deductible from output VAT, provided there is a valid tax invoice in the company’s name. Some expenses are non-deductible (certain entertainment costs, for example), so consult your accountant. A system that computes VAT on every expense and separates it into the input VAT account makes the return a matter of reading a report.

Common mistakes

• Mixing the owner’s personal expenses with the company’s.
• Recording revenue when collected rather than when earned, so profit swings between months.
• Booking asset purchases as expenses, showing a phantom loss in the month of purchase.
• Undocumented expenses entered from memory at month end.
• A huge “miscellaneous expenses” account hiding what nobody wants to classify.