Why you should never invoice a trust deposit

A firm asked a client for a deposit of P40,000 on a matter, and asked for it the way it asked for everything else: with a tax invoice. The client paid, the invoice was marked paid, and the books recorded P40,000 of fee income — with VAT on it.

Two months later the firm earned P23,000 of fees on the matter and invoiced those too. The books now showed P63,000 of income from a client who had been billed P23,000 of work. The other P17,000 still belonged to the client — and the trust ledger had never heard of any of it.

Why it goes wrong

• •A tax invoice says the firm has earned the money. A deposit has not been earned; it is held.
• •Income is overstated, so income tax is overstated.
• •VAT is declared on money that was never a supply, and must be corrected with the BURS.
• •The client's trust ledger shows nothing held, so the client's statement and the trust reconciliation are both wrong.

The right way

• •Ask for the deposit with a trust deposit request — no VAT, nothing in income.
• •Record it as Money received for a client on the client's ledger when it lands.
• •When the work is done, use Bill this client from trust, send the fee note, and Settle it from trust now for the P23,000.
• •Pay the remaining P17,000 back to the client with Paid out on the client's instruction.

If it has already happened

• •Raise a credit note against the tax invoice for the deposit, giving the reason. That takes the income and VAT back out.
• •Record the deposit on the client's trust ledger, dated the day it reached the bank.
• •Settle the real fee note from trust, and pay out or keep holding the rest.

Bala now asks the question for you: when you record a payment on a fee note, it asks "Was this money paid into your trust account as a deposit?" Answer It's a deposit into trust and the money goes to the trust ledger; the fee note is not marked paid.