Defining an Expense
We all know about expenses! They are a fact of life and never seem to slow down but how do you determine an expense for the purposes of bookkeeping?
I’m sure that it’s a question we’ve all asked when an expense occurs and it can be a bit of a grey area knowing which account to put it to.
Questions to ask to help decide this are:
1. Is this a long term expense such as a personal loan, car loan or mortgage?
2. Is this purely an expense associated with the operation of my business?
3. Is this a personal expense?
4. Is this expense a mixture of business and personal?
5. Is it a transfer to another bank account in the business name?
If you answered yes to question 1 then you will need to add an account in the liabilities part of the chart of accounts to put these expenses to. The GST claimable on this should be determined by your accountant.
If you answered yes to question 2 then it’s an expense in the chart of accounts and can either be categorised as a “cost of goods sold” expense or an “operational expense”. You can claim any GST portion on these expenses if you’re registered for GST.
If you answered yes to question 3 and it’s a personal expense that was paid out of business funds it should be allocated either to the “director’s loan” liability account if you operate a company or the “drawings” asset account if you are a sole trader, partnership or Trust. You cannot claim GST on these expenses.
If you answered yes to question 4 and the invoice for the expense contains a mixture of expenses you can separate the items on to different lines and code them accordingly. You are only able to claim GST on the business portion of the expense.
If you answered yes to question 5 then you simply allocate the funds to the relevant bank account – it’s not a true expense.
So, next time you’re unsure of how to allocate an expense, just ask yourself these key questions! If you are still unsure about the nature of an expense we are always available to help.
Alison Rantin | Bookkeeper | The Money Edge | Bundaberg