How to record a purchase

Your chart of accounts gives each purchase a home: business.gov.au describes it as the list of accounts a business sorts its transactions into. Most purchases fall into one of these groups:

• Everyday running costs, such as rent, advertising, utilities and insurance, which business.gov.au's profit and loss template lists among expenses.
• Equipment, vehicles, furniture and tools that the business keeps and uses, which appear under fixed assets in business.gov.au's balance sheet template.
• Stock bought to sell, which is inventory and has its own entries.
• Costs paid in advance for a later period, which the balance sheet template lists as prepaid expenses under current assets.

Where an item sits between groups, such as an expensive tool, ask your accountant how it is treated in your accounts, then use the same answer every time.

Each purchase goes in from the supplier's bill, invoice or receipt. Under the ATO's rules a record generally needs the transaction's date, amount, nature and purpose, plus how the parties are related where that matters. A supplier's invoice covers most of that, and a short note can add the purpose.

Enter each purchase once. Suppliers often send a bill and later a statement listing the same bill; enter from the bill and use the statement only as a check. A bank or card line for the same purchase is the payment, not a second purchase.

• Bought on account, accrual accounting: when the bill arrives, debit the cost, asset or inventory account and credit accounts payable. When you pay, debit accounts payable and credit the bank.
• Paid at the time: debit the cost, asset or inventory account and credit the bank, the credit card or cash on hand, whichever paid for it.
• Bought on account, cash accounting: business.gov.au explains that the cost isn't recorded until the bill is paid, so the entry is made on payment, debiting the cost and crediting the bank. Keep a list of unpaid bills, because the books won't show them.

In the example the laptop is recorded once, as equipment, when its bill arrives, and paying the bill only clears accounts payable. Whether an item like this is recorded as an asset or an expense, and how it is treated after that, is a question for your accountant.

The phone bill is split between the business share and the private share. The example is a sole trader's, so the private share goes to drawings, which business.gov.au's glossary describes as personal costs met from a business account. Which owner's account suits any other business structure is a question for your accountant.

Phones, internet plans and vehicles are often used both for the business and privately. For mixed-use costs, the ATO wants clear documents that show the business share, and getting that share right is one of its tips for avoiding record-keeping errors.

Record how you arrived at the split, such as a usage log or a note of the method, and keep it with the bill. Use the same method each time unless the way the item is used changes.

• Match each payment to the bill it pays, so the supplier's balance in your books stays right.
• Record a part payment against its bill and leave the rest open.
• If you pay a bill by credit card, the debt moves from the supplier to the card provider: debit accounts payable and credit the credit card account.
• Before paying, check the bill isn't already marked as paid, since a bill paid twice is easy to miss until the supplier's statement arrives.

• Recording the bill as a cost and then the payment as a cost again.
• Entering the same purchase from the bill, the supplier's statement and the bank line.
• Using an account that does not match the purchase's agreed treatment, such as expensing an item your accountant has classified as an asset or missing a required prepayment.
• Leaving small cash purchases out because there was no invoice. A receipt is enough to record them.

Hold purchase records for 5 years in most cases, business.gov.au says, stored where they can't be altered or damaged. Scanning is an option: business.gov.au says the ATO accepts a digital image of a paper record that is a true and clear copy and follows the record-keeping rules. Keep the paper original if a particular law or rule requires it.