Invoices and Cash

Invoices and Cash

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In our business a lot of the fitters in the workshop orders parts through our accounts for their own use outside of work. I have found out today that our accounts are wanting them to pay for them with cash. The person in accounts has explained that she takes the cash for the relevant invoice the business has recieved and puts it into petty cash, and lets the business clear the invoice, later banking the cash into the business bank account. I'm convinced this isn't right and doesn't add up for our books or show any trace of where that cash has come from in our books? i'm rather confused on the situation and could do with some clarification on the matter

Thanks

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RLI
By lionofludesch
23rd May 2014 13:06

Sales

In effect, this cash is sales. Should be accounting for VAT on the sales (not clear whether you're doing this).

How you account for it depends on your system.  You may need to raise separate invoices for each sale or you may be happy with a global invoice for the week/month/whatever.  Or you might just treat it as retail sales like the corner shop.

The entries for £120 of cash received are

Debit cash (and later bank, if it's banked) £120

Credit  sales £100 VAT Output tax  £20

Simpuls.

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By Chris08
23rd May 2014 13:38

But then..

.. the payment to the supplier should also be an expense.  So if they reimburse for the exact amount it may not be a serious issue.  If you have made no profit on sale, there is no tax loss, and if you have charged the same output VAT as you are claiming inputs, there is no VAT loss. 

In principle there is nothing wrong with the arrangement, providing it is properly documented and recorded. But as I see it, you have 2 issues:-

1) If you have been recording the payments to the suppliers, but not the receipts from your workers, then you have probably underpaid your taxes and VAT and need to make appropriate disclosure and amendments.  Suggest you speak to your accountant straight away.

2) The very fact that there is no evidence as to the source of these monies may cause concern for HMRC were they to ever investigate your business.

 

Not your problem, but it also raises concerns for the fitters who have been buying these products

a) They are presumable declaring these extra activities as a trade and filing tax returns -if not they should.

b) Assuming they are properly filing tax returns, without invoices issued in their names they cannot evidence the expense,so may have trouble claiming the deduction.

 

 

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Replying to atleastisoundknowledgable...:
RLI
By lionofludesch
23rd May 2014 14:14

No problem

Chris08 wrote:

.. the payment to the supplier should also be an expense.  So if they reimburse for the exact amount it may not be a serious issue.  If you have made no profit on sale, there is no tax loss, and if you have charged the same output VAT as you are claiming inputs, there is no VAT loss. 

Indeed, the payment to the supplier should be an expense. I assumed that was already happening.

I don't see a problem if the firm is charging a different amount to the fitters.  Firms are allowed to make a profit.

I'm sure the fitters will be aware that there's a paper trail, despite them paying in cash. Nothing for the OP to worry about there.

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By Michael C Feltham
23rd May 2014 14:25

Imprest System:

Quote:
The person in accounts has explained that she takes the cash for the relevant invoice the business has recieved and puts it into petty cash,

Quelle Horreure!

Petty Cash should properly operated on what is called an Imprest Float System.

Petty cash is a favourite way for naughty people to extract cash from a business.

Also often an area VAT inspectors regard with cynical and jaundiced eye on control audits.

Correct Method:

Accounts person raises bill against a "Purchase Request" from the fitter concerned once parts  are received.

Business purchases parts: fine, receives invoice.

Fitter pays for parts in cash: sales invoice states purchase price net, plus VAT at standard rate;  cash paid into bank.

Business adds sales invoice to VAT account showing net cost + VAT:

Business deducts purchase again at net price + VAT on VAT Account.

Result: transaction VAT transparent: no VAT paid over and above VAT clawed back from expenditure offset.

 

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By johngroganjga
23rd May 2014 14:26

Not sure what the problem is here.  There is nothing wrong with cash sales provided they are recorded properly and at the right time.

The OP does not mention how long the delay is between the receipt of the cash and the raising of the invoice.  Presumably the sale is recorded at the very latest when the invoice is raised, but perhaps even sooner.  There must be an earlier record to trigger the issue of the sales invoice.  Is that when the sale is recorded? 

 

 

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RLI
By lionofludesch
23rd May 2014 14:37

Agree with ....

...... John - but also with Michael that there's scope for dishonesty here.

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By Jeffre
23rd May 2014 14:46

dishonesty??

I think I am not the only one who might smell something here.

nowhere does the OP say that an invoice is raised for the sale but says that the cash is banked. This system is open to abuse on

1) who checks the purchase invoices to ensure all purchases are correct and all fitters orders have been correctley recharged

2) Who checks that all invoices if recharged have been collected

3) who checks that the "cash" collected has ALL been paid to bank

4) What term is used against this payment to bank

 

I have found in the past that a lot of small fraud was via petty cash as the owners rarely check it as it is normally small

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Replying to lionofludesch:
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By Michael C Feltham
24th May 2014 17:47

Much Agree!

Jeffre wrote:

I think I am not the only one who might smell something here.

nowhere does the OP say that an invoice is raised for the sale but says that the cash is banked. This system is open to abuse on

1) who checks the purchase invoices to ensure all purchases are correct and all fitters orders have been correctley recharged

2) Who checks that all invoices if recharged have been collected

3) who checks that the "cash" collected has ALL been paid to bank

4) What term is used against this payment to bank

 

Quote:
I have found in the past that a lot of small fraud was via petty cash as the owners rarely check it as it is normally small

Which is why I always suggest an Imprest Float System!!

Two activities tend to be rife with dishonesty. Garages and Pubs! Both enjoy loads of cash floating around!

My practice was built, originally, on licensed trade clients. The casual nicking was a huge problem. Mainly since the licensees were cavalier in their own attitude towards cash floats and random expenditure.

I was most fortunate in that one of my original mentors was a hugely experienced publican and long-time chair of his LVA. The other was an older stocktaker who had been on the consultant panel to Customs and Excise in the pre-launch phases of Value Added Tax.

I also spent my early career in the automotive industry: both manufacturer and distributor and dealer level: eventually founding and running my own very busy specialised garage and motor sport biz.

PJs (Private Jobs) are the bane of the retail motor business; as parts ordered for "weekend work" are too often, err forgotten. All my mechanics and the foreman too had their own Job Card on the system I demanded. ANYTHING ordered had to have a purchase number and be allocated to a job: same with regular top ups for stores. If allowed mechanics would sort of help themselves to fast moving items (Plugs; Points -then! - gaskets; oils; filters etc).

Petrol was another favourite! Amazing how many garage owners failed to properly audit this. Problem here being the cost and lack of profit. If someone nicks a gallon it takes the sale of many gallons to just see the capital returned......

Shrinkage, huh?

 

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RLI
By lionofludesch
25th May 2014 08:54

The "lady in accounts"

I suggest that someone has a chat with the "lady in accounts" and points out the scope for misappropriation and suggests that she ups her game - "for her own protection".

She could easily be accused of pocketing the proceeds.

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