How to Record Expenses Paid from a Personal or Third Party Account

How to record the payment of a purchase invoice or expense paid from a "personal or third party" account?
 

• To settle an invoice in Accounting you normally have to record a payment against it and select a bank account that was created previously from your Bank tab,  or you can settle it via a credit note. You can not use a journal to settle it with another ledger *.
• To record an expense without an invoice, you also need to record it via a bank account from the Banking tab, if it includes VAT. **

• In our scenario, we also need to show a payment made from outside the business and record it as a liability towards the third party: (associate/business owner/employee, etc.). 

Bearing that in mind, we have 4 possible options:

• Option 1- Via a bank account + journal
  1. Create a "third party" bank account to settle the invoice from it. However, the entry is recorded by default under a bank ledger within the business which is incorrect in our scenario.
  2. Create a journal to transfer the payment from the banking ledger to a third-party liability ledger until the refund is paid.
  3. Record the refund against the liability ledger from the business account.
• Option 2 - Via ledger offset (credit note feature)
  • Settle an invoice via a quick entry - type "credit note", allowing you to use a liability ledger. You can then record the refund against the same ledger. There is no need to create a separate bank account and a journal. However, this option has limitations. 
• Option 3 - Via a Journal: if the expense does not include VAT; it can be recorded in a journal directly between the purchase ledger and the liability ledger.

• Option 4 - Wait only until the expense is refunded by the business. However, this option does not show any liability.

NOTE:

* currently the Journal tab does not allow you to settle an invoice created under the Sales or Purchases tab.
** If the expense includes vat it is not possible to record it directly under the Journal tab if you want the vat to be picked up in the return. It needs to be recorded from Banking. However, If there is no Vat, the expense can be recorded directly against a liability ledger from Journals. 

Option 1 - Create  a 'Third-party bank' account and a Journal

1. Create a new "Third Party" bank account
   • Banking > New > Create Bank account . More info: Add and manage bank accounts
   • Clearly identify it as a "Third-party account" or "Personal" account according to your needs. 
     • Important>The ledger associated with the bank account is created automatically as a business bank ledger and cannot be changed to another category. This means that any activity in this bank account, even though labeled as "third-party', will show incorrectly as an activity within the business bank ledger. For that reason, we need to create a journal to transfer the transaction to another ledger and keep the balance in this "third party" account to zero at all times
   • Take note of the ledger number created by default for this account: You can find it in the bank account details window.
   • Make sure to follow all the steps below:
2. Record the expense from the new Third-party account.
   • From the Third-Party bank account you can either:
     • Pay the outstanding invoice, Pay one or more purchase invoices in Accounting
     • Create directly Other payment if there is no invoice.  Record a payment other than for a purchase invoice in Accounting
     • Create a Payment (Start Users) Record "money out" in Accounting Start
   • > The expense is then paid, and the supplier debt is settled.  However, in our reports  it shows as a business bank activity which is incorrect: we still need to show the business owes money:
3. Create a journal to transfer the expense to the correct liability ledger
   • Journal > New Create journal entries in Accounting
   • Debit the "third party" bank account ledger used above, for the total amount of the expense.
     • > This will automatically record a "receipt" in your "third party" bank activity, which will reverse the payment made and will zero that account.  (the payment never happened as far a the business is concerned)
   • Credit the liability ledger of your choice for the total amount of the expense.
     • > This will record the transaction into the correct ledger category and show the liability properly in your balance sheet and other reports.
4. Record the refund :
   • Whenever the business refunds the money back: Record an Other payment from the business account against the liability ledger used in step 3. 
     • > This will settle the debt and will show the payment paid by the business in real life.

NOTE: You could skip step 3+4 only if you Refund straight away and create a Transfer money between bank accounts from the business to your personal account: however this will not show any debt activity.  

CAUTION: creating a third-party account within your business bank activity is only suggested as a workaround. The idea is to get refunded and keep the balance to zero on that account. But if you don't do this straight away it will show incorrectly as a non-business activity in your business reports.
Also, you do not want to connect your personal account to your bank, or import your personal transactions, as you do not want to reflect any other transactions that is not related to the business.

Option 2 - Settle a purchase invoice via ledger offset*

1. Settle the invoice via ledger offset: How can I settle my invoice via ledger offset in Accounting?
   • This method uses the purchase quick entry - credit note feature allowing you to select the liability ledger of your choice to settle the invoice rather than a bank ledger.
2. Record the refund
   • From your bank account, when refunding the third party, Record an Other payment and select the same ledger used in the quick entry in step 1.

NOTE:

* This option is not suitable to Start users, as the quick entry feature is not available in that version. Also not suitable for intracommunity purchases, as reverse charge cannot be managed via quick entries.
* This option records the purchase and the third party liability correctly in your ledger entries and financial reports, but the "credit note" cancels the purchase figure given in the Customer tab and the Purchase daybook.  

Option 3 - Journal

If you don't need to collect the VAT, you can simply record the transaction directly between the purchase ledger and the liability ledger or your choice from the Journal tab.
Create journal entries in Accounting
However, this option does not allow you to track the activity for a contact, or manage outstanding purchase invoices.

Option 4 - Wait for the business to refund

You can wait to record the expense directly: from the Business bank account, but only when it is refunded by the business. However please note the liability is not recorded in this case.

You can record the expense either : 

• as Other Payment, if there is no invoice.
• or Supplier payment if you need to settle a purchase invoice. 

Audit Trail:

You can check all the entries recorded; in a debit/credit journal format, from the report Audit trail - detailed view
View an Audit Trail of all transactions in Accounting