Accounting note - how to account for income and expense?

Accounting notes are a special type of accounting vouchers used when certain operations are not subject to the provisions of the Value Added Tax Act. Therefore, they may constitute the basis for showing revenues or costs, depending on by whom they were issued and what their nature is. The article will explain what an accounting note is and how income and expense should be settled on its basis.

What is an accounting note and in what situations can it be used?

Accounting notes in the form of debit, credit or debit-credit are accounting documents used in settlements between contractors used to document operations to which the provisions of the VAT Act do not apply, i.e. those for which tax regulations do not provide for a different method of documentation.

We can issue accounting notes, among others in the following situations:

• burdening the debtor with interest on unpaid liabilities;

• charging a contractual penalty for improper or untimely performance of an obligation;

• burdening the contractor with compensation;

• the transfer to the buyer of costs not subject to value added tax (stamp duties, membership fees, etc.);

• burdening the employee with the costs of penalties, damages or detected shortages.

It should be borne in mind that it is not possible to transfer VAT taxable costs to the buyer by issuing an accounting note. Any transactions subject to tax on goods and services should be re-invoiced taking into account the VAT rate appropriate for a given product or service. The accounting note is therefore not an alternative to an invoice or re-invoice, it is a separate document used only when there is no VAT involved.

Accounting notes should not be used to document VAT-exempt transactions subject to or objectively, as the VAT exemption is not the same as an operation that is not subject to the provisions of the Value Added Tax Act.

In business practice, accounting notes are most often used to charge the debtor with interest for delay in repayment of liabilities or to calculate penalties and damages resulting from contracts concluded with contractors, so let's discuss the method of settling such business transactions.

Contractual penalties based on VAT

The purpose of the contractual penalty and damages is to provide financial compensation for the loss or damage caused.

Art. 483 sec. 1 of the Civil Code

"It may be stipulated in the contract that the damage resulting from non-performance or improper performance of a non-pecuniary obligation will be repaired by paying a specific amount (contractual penalty)."

Tax on goods and services tax is subject to the paid delivery of goods and the paid provision of services within the territory of the country. In order to exclude VAT taxation of damages, reference should be made to the provisions of the Value Added Tax Act (Articles 7 and 8 of the VAT Act). The chargeable delivery of the goods is the transfer of the right to dispose of the goods as owner. It directly follows from the cited definition that the contractual penalty does not constitute a delivery of goods. Any service provided to a natural person, legal person or organizational unit without legal personality, which does not constitute a supply of goods, is considered to be the provision of services. As a rule, a supply is subject to VAT only if the supply of the service is paid for, provided that there is a direct link between the service provided and the remuneration received. Accrued contractual penalty constitutes the title of a separate obligation, is not a direct consequence of the performance and is not a consideration, therefore it is not subject to value added tax.

Receipt of a contractual penalty - how to show the income?

Activities that are not subject to VAT are documented with ordinary bills, accounting notes or other external accounting documents within the meaning of the Accounting Act.

Pursuant to Art. 14 sec. 2 point 4 of the PIT Act, contractual penalties constitute income from business activity. It does not matter whether a given type of contractual penalty constitutes a tax cost of our contractor, which will be discussed in detail later in the article. It should be borne in mind that issuing an accounting note does not yet constitute income within the meaning of the Personal Income Tax Act. The revenue arises only upon receipt of the contractual penalty, i.e. on the date of receipt of cash in a non-cash or cash form. The revenue from receiving a contractual penalty is included in column 8 Other revenues in the tax book of revenues and expenses.

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Accounting note - settlement of the cost of payment of a contractual penalty

Contractual penalties may not always be charged to tax costs. The exclusion from tax deductible costs covers contractual penalties and damages for defects in delivered goods, performed works and services as well as delays in the delivery of goods free from defects or delays in removing defects in goods or performed works and services (Article 23 (1) (19) of the Act on personal income tax). Other contractual penalties constitute a tax expense when the purpose of their incurring is to maintain or secure the source of income, unless there has been a breach of the law, they are not a result of the entrepreneur's negligence or unreasonable actions. In practice, this means that a taxpayer including a contractual penalty in the event of a possible control as tax deductible costs is required to demonstrate to the tax authority that he has exercised all due diligence to avoid, for example, delays in the delivery of goods or services, but despite this, it was not possible to finalize the transaction in the time specified in the contract. The tax costs may include a contractual penalty for withdrawing from the contract, provided that such a decision of the entrepreneur is economically justified and rational from the point of view of obtaining the highest possible revenues, i.e. when, as a result of various circumstances, it is more profitable for the taxpayer to terminate the contract than its implementation.

Contractual penalties are recorded in the column 13 Other expenses. The moment of including the contractual penalty as tax deductible costs (provided that it meets the conditions for recognizing it as a tax cost) at the taxpayer running the PKPiR is the day when the cost is incurred, i.e. the payment of the contractual penalty. The date of issue of the accounting document which is the basis for posting the cost, i.e. in particular the accounting note, is therefore irrelevant both from the point of showing the income with the taxpayer receiving the contractual penalty and the cost of the entrepreneur obliged to pay the penalty.

Accounting note - interest on overdue commercial liabilities on the part of the creditor and the debtor

The method of settling interest on unpaid liabilities calculated on the basis of an accounting note is the same as in the case of a contractual penalty documented with such a note. This means that the creditor's income arises, respectively, at the time of receiving the funds, and not the issue of an accounting note.

Art. 14 sec. 3 point 2 of the PIT Act

"The revenues referred to in paragraph 1 and 2, the amounts accrued but not received on receivables, including loans granted, shall not be included ”.

The debtor's cost arises on the date of payment, respectively, and not on receipt of the accounting note.

Art. 23 sec. 1 point 32 of the PIT Act

"The following are not considered tax deductible costs: accrued but unpaid or remitted interest on liabilities, including loans (credits)".

Please note that we will not include interest on expired or canceled liabilities as tax deductible costs.

We record the received and paid interest on overdue liabilities in column 8 Other revenues and column 13 Other expenses of the tax revenue and expense ledger, respectively.

When the moment of tax revenue / expense arising from the receipt / payment of interest on late payment of liabilities or contractual penalty is determined, the date of issue of the debit note is irrelevant, the date of actual receipt / payment of funds is counted. In order for interest or contractual penalties to be a cost for the taxpayer, they must be paid and not only charged, then the creditor is also required to demonstrate income on this account. Both contractual penalties and interest on unpaid liabilities are not subject to VAT, therefore, in order to charge the debtor, no VAT invoice should be issued, but another accounting document, e.g. an accounting note.