When you are a business owner, whether a sole trader or limited company, especially in the early days before you are bringing much money in, it can be way more convenient to pay for items personally rather than through your business bank account ...
It makes bookkeeping simpler if you can have a business bank account or a credit card you use exclusively for business-related purchases, but I know this is not always possible. Or we simply forget and use the wrong card when out and about.
And, of course, you must keep the receipts so you can 'put them through' your business and in effect reduce your tax bill. I would look carefully at what expenses are tax-deductible and which are not, but that is a topic for another day.
For this blog post, we are assuming that what you have bought is a legitimate tax-deductible expense, which can be different if you run through a limited company or are a sole trader. You can be paying for items personally as you build your business and then reimburse yourself later once your business is profitable.
There are a few different ways of processing these expenses in your accounts package and you should choose the method which makes the most sense to you and suits your requirements.
- Option 1 - through the supplier invoices/bills area to claim expenses and refund yourself
You can choose to treat yourself as a supplier and create a supplier account to enter your expenses through. You can then gather up all your expenses periodically, weekly, monthly or quarterly depending on amounts involved, and create an invoice for each period with one line per expense item so you can analyse to different account codes (stationery/equipment or whatever you bought) and also account for VAT if needed.
You will then need to mark these invoices as paid so you can pay yourself the total of each invoice from the business bank and match this invoice to that payment.
- Option 2 - operate through a 'cash' account
You can create a bank account called petty cash or similar and enter the receipts and invoices as you normally would, but mark them as paid through this cash account. Then the balance in this account can be adjusted through either the directors' loan account or drawings account periodically or at the end of the financial year.
You can also refund yourself the monies through the account by doing a bank transfer between your main bank account and the cash account if you want to through the year.
- Option 3 - using a directors' loan or drawings bank account
This works well if your business is not profitable yet and you want to claim expenses at a later date. It is also possible to set up a bank account, I call it the 'bank of me', to use in a similar way to option 2. Also if you use Xero you do not need to set this up as a bank account per se, but you can just go into your existing directors' loan or drawings account through the accounting/chart of accounts menu option and ensure that 'enable payments' to this account option is ticked.
This means when you enter a bill in Xero which you have paid for personally, you can then mark it as paid to this account directly instead of needing to go through a bank account. Often again at year-end, any balance left in this account is adjusted to your main directors' loan or drawings account before your accounts are finalised.
- ption 4 - use expenses
Xero has an expenses option which you can use in a similar way to option 1, but using the expenses feature of Xero. Again you enter the expenses individually through the expenses area and then approve them when you are ready to reimburse yourself and match the expenses to the payment made through the bank.
If you would like some support in working out the best method for you and your company then why not arrange a handholding session where I can support you in setting up your accounts to allow you to simply and easily manage your expenses to ensure you claim back everything you should and don't pay too much tax or miss relevant expenses.
If anything I've written here resonates with you, call me on 01604 420057 and let's see how we can help you.