Following recent ATO audit activities, accountants have been cautioned about the use of accounting journal entries in relation to non-cash transactions without having the supporting documentation to substantiate that the transaction has occurred.
The issue of journals alone without supporting documentation has been an ongoing issue for the ATO. The ATO is concerned that many accountants in the industry act on the presumption that journal entries can be a viable substitute to reflect transactions which have not actually occurred. Legally, this is not the case, and where the ATO finds that accounting entries have been used in this way, clients and accountants will be challenged by the ATO. Journal entries are a record of a transaction, emanating from a legal document (i.e. invoice, written agreements, deeds, minutes, written resolutions or other directive) that has occurred, the journal is not in itself a transaction.
For example: A company declares a dividend in order to meet a Division 7A minimum repayment for a shareholder. According to the journal transactions in the company’s file, this dividend is directly used to pay down the loan. No cash exchanges hands from the company to the shareholder, back to the company. An accounting entry alone recording the dividend expense and the loan repayment concurrently is not enough to substantiate that the transaction occurred. Without supporting documentation in the form of a written agreement, minutes and resolutions, the ATO seeks to conclude that the shareholder was not aware of the dividend and supporting journal transactions
In order to ensure every accounting entry is validly reflecting a transaction, it is imperative that Directors and/or Trustee’s maintain documentation in the form of invoices, legal agreements and written obligations, minutes, resolutions, and statements which are dated and signed by the relevant parties in the transaction. Wherever there is a non-cash transaction, these documents confirm that the transaction has occurred and support the accounting entries processed to reflect the same, thereby reducing the risk of adverse audit conclusions.
Date of Issue: 2 August 2019
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