Recording expenses and keeping receipts

Every cost in an Estonian company's books needs a document behind it. The document is the proof for the tax office, for the bank and for your own understanding of where the money went. This guide explains what counts as a business expense, which documents to keep and for how long, how to record VAT on a purchase, and what to do when you pay for something from your own pocket.

What counts as a business expense

A business expense is a cost that the company incurred to earn its income. Rent for the office, software subscriptions, accounting fees, travel for a client visit and the materials you use to deliver a service are typical examples. The test is the purpose of the cost, not the name on the receipt. A cost that is private, such as a family holiday, is not a company expense, even when it was paid with the company card.

Some costs have special rules. Passenger cars, gifts, entertainment and representation are examples. In Estonia the tax treatment of such costs can differ from the accounting treatment, and some of them are taxed as a distribution of profit when they are not business costs. Before you record a large or unusual cost, check the current rules on the EMTA website, or ask an adviser.

Documents you must keep

A cost is recorded from a document. For a purchase from a company, that is the supplier's invoice. For a small cash purchase, it is a receipt. The document should show:

• the supplier's name, address and registry code, or VAT number
• the date and a number that identifies the document
• what was bought, with the quantity
• the price, the VAT rate and the VAT amount, if VAT is charged
• the total paid

Keep the original or a clear copy. Keep it with the entry it supports, so that anyone checking the books can follow the trail from the entry to the document in a few seconds.

The Accounting Act requires accounting documents to be kept for seven years. Check the current text on Riigi Teataja before you set a deletion rule.

Recording a purchase

Recording a purchase means writing the entry in the books with the right account and the right VAT class. A simple purchase of a software subscription for €100 plus €24 VAT is recorded as follows. The cost account is debited for €100. The input VAT is debited for €24, because you can reclaim it if the purchase is for the business and the invoice is complete. The supplier is credited for €124, which is a payable until you pay it. When you pay, the bank account is credited and the payable is cleared.

The same purchase paid straight away from the company bank account has the bank credited instead of the supplier. Either way, the books show a debit and a credit of the same total, so the entry balances.

VAT on purchases

If your company is VAT registered, the VAT on a purchase is usually input VAT, which you deduct in the KMD for the period. Two conditions matter: the invoice must be complete, and the cost must be used for taxable business activity. A purchase that is used for both business and private purposes needs a split. A purchase that is exempt or outside the scope of VAT may carry no input VAT at all.

If your company is not VAT registered, the VAT on a purchase is a cost. It is part of the amount you pay, and it is recorded in the cost, not in a separate VAT account.

Costs you paid with your own money

Sometimes the owner pays for a company cost from a personal card or from cash. The company still owes the money. Record the cost as a purchase, and record that the owner paid it. The balance between the owner and the company is an owner loan. It is a liability of the company while the company owes the owner, and it goes down when the company repays the owner from its account.

The rule has a limit. An owner loan is not a way to take money out of the company without tax. Money paid to the owner that is not a salary or a dividend, and that is not a documented company cost, can be taxed as a distribution. If you are unsure, read the lesson on when you pay with your own money and ask an adviser before you take a large amount.

Keeping the trail tidy each month

Every month, match the documents to the bank. A supplier invoice without a payment is a payable. A bank payment without a document is an open line, and it must be explained. Use the reconciliation step to close these gaps while the details are still fresh.

A simple monthly check finds most problems:

1. Every purchase invoice of the month is recorded, with its VAT class.
2. Every bank payment is matched to a document or explained with a note.
3. Every owner-paid cost is recorded as an owner loan.
4. Every receipt is attached to its entry.

When you lose a document

Ask the supplier for a copy, or for a new invoice that shows the same details. If that is not possible, record the cost with a note that says what happened and why the cost was for the company. Do not invent a document. A cost without any document is the weakest position, and it is the first thing a reviewer questions.

Key terms in this guide

• Journal entry: each cost is recorded as one entry with a document behind it.
• Input VAT: the VAT on a purchase that you can reclaim.
• Payable: an unpaid supplier bill.
• Owner loan: money the owner paid for the company, or took out of it.
• Liability: an amount the company owes.
• Debit and credit: the two sides of each entry.
• Reconciliation: matching the bank to the documents.
• Asset: something the company owns that has value.
• Fixed asset: an asset kept for more than one year.
• Depreciation: the yearly cost of a fixed asset.
• Output VAT: the VAT on your sales, which the input VAT offsets.
• Foreign currency: a purchase written in another currency.

Sources

• Accounting Act (raamatupidamise seadus), document retention, Riigi Teataja: riigiteataja.ee
• Income Tax Act (tulumaksuseadus), distributions and costs, Riigi Teataja: riigiteataja.ee
• EMTA, value added tax and input VAT: emta.ee