SARS is always on the lookout for any irregularities in your company records. And this includes the way you record insurance costs in your accounting records.
In fact, one wrong move could land 'your directors and prescribed officers in jail for up to 10 years, according to the 2008 Companies Act,' warns the Practical Accountancy Loose Leaf.
So make sure your company's avoids falling into these two common insurance errors.
Two insurance errors your company MUST avoid at all costs
Error #1: Incorrect treatment of insurance claim proceeds paid to your account as income.
According to the Loose Leaf, many business owners get accounting issues relating to insurance wrong.
For example, when they receive a payment from a successful insurance claim, a large percentage of business owners reflect the payment as income.
This is wrong! This transaction has everything to do with assets and nothing to do with income.
Record your transaction to show the money has been received to compensate for the expenditure incurred in repairing your insured asset. If you record the proceeds from an insurance claim as income, you'll incorrectly be overstating your income and, as a result, overstating your profits and your taxable income!
Error #2: Incorrect accounting for claims paid directly to the repairs company.
Let's say one of your company assets, for example, your company's delivery van is damaged, you take it for repairs and the insurance company pays the repairs costs directly to the repairer.
Countless business owners don't know how to record this transaction in their accounts. Instead, 'they record the full invoice value as well as any excess payments as repairs and maintenance costs,' says the Loose Leaf.
To get this right, if you record the full invoice for repairs and maintenance in your accounts, record the payment made by your insurance company again by debiting the repairer's account and crediting repairs and maintenance account.
Report insurance claims correctly or face the wrath of SARS
Remember, if you overstate your expenditure, SARS will think you're trying to avoid paying the correct amount of tax because this is one of the most common methods that tax fraudsters use.