Bank Statement as Proof for Business Expense Deduction

Linda Puriņa, Head of the Accounting and Finance Department at the Latvian Rural Advisory and Training Centre (SIA “Latvijas Lauku konsultāciju un izglītības centrs”)

Reader asks: A self-employed person has acquired a mobile phone in installments from a telecommunications operator for business use. The monthly invoice for the phone is issued in the name of her husband. Can the self-employed person treat these expenses as business-related?

Article 8, Part 1 of the Accounting Law (GL) states that entries in accounting records must be based on supporting documents. The requirements for such documents are set out in Article 11 of the GL, which includes information about the document's issuer and other transaction parties. In this case, the issuer is the telecom provider, but the invoice lacks information identifying the actual recipient of the service – the self-employed person.

According to subparagraph 10.6.1 of Cabinet Regulation No. 322 “Procedure by which individual merchants and other natural persons carrying out economic activity, individual enterprises, and farms keep accounting records in a simplified system”, entries in the income and expense journal are made based on external supporting documents (e.g., account statements of payments made by the individual on a specific date or period, cash register receipts, receipts or tickets registered with the State Revenue Service (VID)). Essentially, it is sufficient that the payment has been made and appears in the payment account statement.

In simplified accounting, transactions are recorded on a cash basis – when money is received or paid. Therefore, journal entries are based on bank account statements, not invoices. However, it would be logical to have a supporting document, such as an invoice clearly stating what the payment was for and its amount.

However, some legal provisions give further guidance on supporting documents and their registration. Article 11, Part 8 of the GL states that an external supporting document can also be considered valid even without the “signature” field, as long as it contains other required fields listed in Part 5 and includes information about the business transaction. The existence of the transaction must be confirmed by a responsible person, as designated by the business manager, who ensures the accuracy of the information provided in the supporting document. One such document mentioned is the account statement. According to Article 3, Part 2 of the GL, the term "enterprise" also includes natural persons conducting economic activity. Regulation No. 322 likewise refers to account statements as valid justification for entries in the income tax journal. Thus, if the self-employed individual certifies that a payment in the account statement relates to business activity, an invoice may not be required. Nevertheless, in such cases, it is recommended to have a statement from the VID or a signed declaration from the individual, confirming that the expense is business-related and thus eligible for inclusion in expense deductions.

On the other hand, if the person is a VAT payer, then a proper VAT invoice with all mandatory fields is required in order to deduct input VAT.

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