How to Record Expenses Paid on Behalf of Clients Correctly in Zoho Books

It looks harmless at first. You paid money out of your business account, so you record an expense. What could possibly go wrong?

But over time, this seemingly innocent mistake distorts profit margins, inflates cost structures, creates misleading financial reports, and exposes your business to tax complications that can be costly to unravel.

Let’s break this down properly—because clean books start with correct thinking, not just correct clicks.

Which Businesses Are Most Affected by This Issue?

Before we dive into the solution, let’s identify who needs to pay special attention to this. If your business falls into any of these categories, you’re likely making payments on behalf of clients regularly—and you need to get this right:

Understanding the Zoho Books Expenses Module

Before we discuss the correct treatment of client-recoverable expenses, let’s establish what the Expenses Module in Zoho Books is designed for and how it works.

What Is the Expenses Module?

The Expenses Module in Zoho Books is the primary tool for recording all money that flows out of your business. It’s designed to track:

• Operating expenses – rent, salaries, utilities, supplies
• Vendor payments – purchases from suppliers
• Reimbursable expenses – costs that will be billed to clients
• Petty cash expenditures – small day-to-day costs
• Any business payment made through bank, cash, or other payment methods

Why the Expenses Module Is Important

The Expenses Module provides several critical functions:

1. Cash tracking – It records actual money leaving your bank or cash accounts
2. Vendor management – Links payments to specific suppliers and vendors
3. Audit trail – Creates a complete record with dates, amounts, and supporting documents
4. Expense categorization – Organizes costs by account type for reporting
5. Tax compliance – Captures information needed for VAT, WHT, and tax filings
6. Billable expense tracking – Identifies costs that should be recovered from clients

How the Expenses Module Works

When you create an expense in Zoho Books, you’re essentially telling the system:

• Who you paid (vendor/payee)
• How much you paid (amount)
• When you paid (date)
• Where the money came from (bank/cash account)
• What account should be debited (the expense category)
• Why you paid (description and reference)

The system then creates a double-entry accounting transaction:

• Debit: The expense account you selected (increases that expense category)
• Credit: Your bank/cash account (decreases your cash balance)

The Critical Choice: Which Account to Debit

The most important decision when recording any expense is: Which account should I debit?

This single choice determines whether the expense:

• Reduces your profit (if you select a P&L expense account)
• Creates an asset to be recovered (if you select a Balance Sheet asset account)

For expenses paid on behalf of clients, you must select a Current Asset account—not an expense account. This is the key to proper accounting treatment.

Now let’s understand what makes an expense “recoverable” and how to handle it correctly.

What Does “Expenses Paid on Behalf of a Client” Actually Mean?

These are costs you incur temporarily on a client’s behalf, which have three defining characteristics:

1. They do not belong to your business – The expense isn’t yours to bear economically
2. They are meant to be recovered from the client – You expect full reimbursement
3. They should not reduce your profit – Your operating margin should remain unaffected

Common Examples Across Industries:

• Real estate: Property registration fees, survey costs, title documentation charges
• Corporate services: CAC fees, annual returns, regulatory registrations
• Legal services: Court filing fees, land registry searches, bailiff charges
• Logistics: Customs duties, port charges, inspection fees
• Consulting: Professional licenses, training fees, software subscriptions
• Marketing: Media buying costs, third-party vendor fees, event charges

Why This Gets Misposted So Often

Many Zoho Books users (and users of other accounting systems like QuickBooks and Sage 50) follow this flawed pattern:

1. Open the Expenses Module (correct so far)
2. Post the cost as an Expense (still correct)
3. Select an operating expense account like Travel, Professional Fees, or Miscellaneous Expenses (this is the fatal error)
4. Forget to track recovery properly, or assume that invoicing the client later “fixes” the problem
5. Move on without realizing the accounting damage being done

If you’ve noticed your profit swinging wildly every time you help a client pay a bill, or if your expense ratios seem inexplicably high compared to industry peers, this misposting is likely the culprit.

The Right Accounting Treatment (Concept First)

From a fundamental accounting perspective, expenses paid on behalf of clients are recoverable costs, not business expenses. This is a critical distinction that affects where these transactions appear in your financial statements.

These Costs Should:

• Sit on the Balance Sheet, not the Profit & Loss statement
• Appear as Current Assets (because the client owes you money—this is essentially a short-term receivable)
• Be cleared when the client is billed and pays
• Have zero impact on your operating profit

This is fundamental accounting logic—and it’s critical to get right in any accounting system, whether you’re implementing Zoho Books, QuickBooks, or Sage 50 for your Nigerian business.

How to Record This Correctly in Zoho Books: Step-by-Step Guide

Journal Entry vs Expenses Module — Which Should You Use?

This is where many people get confused, especially those transitioning from manual bookkeeping or Excel-based accounting. Let’s clarify this once and for all.

Scenario	Use This	Why
You just paid cash/bank for an expense	Expenses Module	This is a real cash transaction that needs vendor tracking and audit trail
You want to track vendor/supplier details	Expenses Module	The Expenses module automatically links to vendor records
You need a clean audit trail	Expenses Module	Expenses module provides better documentation and attachments support
This is a routine, day-to-day transaction	Expenses Module	This should be your default option for all normal business transactions
Recording expenses paid on behalf of clients	Expenses Module	Real payment was made—just post to the correct account (Client Recoverable)
Correcting a past posting error	Journal Entry	To reclassify without disturbing the original transaction
Reclassifying wrongly posted expenses	Journal Entry	To move amounts between accounts retrospectively
Adjusting balances during migration	Journal Entry	For opening balances and historical adjustments
Handling rare, non-cash adjustments	Journal Entry	For depreciation, accruals, provisions, prepayments, etc.

Why This Matters More Than You Think

The consequences of wrongly posting expenses paid on behalf of clients extend far beyond just “messy books.” Here’s what actually happens in your business:

1. Profits Are Understated

When recoverable costs hit your P&L as expenses, your net profit appears lower than reality. This affects:

• Investor confidence: Your business looks less profitable than it is
• Loan applications: Banks see reduced profitability and may decline credit facilities
• Business valuations: Your company is worth less on paper, affecting sale or partnership opportunities
• Partner distributions: Profit-sharing calculations become incorrect, causing disputes
• Performance bonuses: Staff bonuses tied to profitability are miscalculated
• Business confidence: Owners lose motivation thinking the business isn’t performing

2. Management Decisions Are Flawed

When your expense reports include costs that aren’t yours:

• You can’t accurately calculate your true operating expense ratio
• Cost control measures target the wrong areas (you’re trying to “cut” expenses that aren’t really yours)
• Pricing decisions become flawed (you think your costs are higher than they are, so you overprice)
• Budgeting and forecasting are based on distorted historical data
• You can’t properly analyze expense trends or identify real cost overruns
• Profitability by service line becomes impossible to measure accurately
• Staff productivity metrics get skewed when tied to revenue vs. expense ratios

3. Tax Exposure Increases

In Nigeria, tax implications of improper expense recording include:

• Overstating deductible expenses that aren’t actually your business expenses—this is a serious compliance issue
• Potential FIRS audit triggers when expense patterns don’t match revenue or industry norms
• Problems with VAT recovery on items that should be passed through to clients
• Complications with Withholding Tax (WHT) on payments made on behalf of clients
• Issues during tax audits when examiners question the legitimacy and ownership of expenses
• Transfer pricing concerns if operating across multiple entities
• Inability to properly support expense claims during tax investigations

4. Reports Lose Credibility

When stakeholders can’t trust your financial reports:

• Internal credibility suffers – your management team questions all financial data
• External audits become expensive – auditors spend more time reconciling and investigating
• Investor relations deteriorate – repeated restatements damage confidence
• Banking relationships weaken – frequent corrections raise red flags for lenders
• Regulatory scrutiny increases – inconsistent reporting attracts attention
• Business reputation suffers – word spreads about financial management issues

5. Industry-Specific Impacts

For Real Estate Agents: When property-related fees are misposted, you can’t accurately calculate commission margins or cost per transaction. This makes it impossible to evaluate agent performance or identify profitable property types.

For Corporate Services Firms: Mixing client registration fees with your own operating expenses makes it impossible to calculate your true service delivery cost, affecting pricing strategy and profitability analysis per client type.

For Logistics Companies: When customs duties and port charges hit your P&L, your gross margins appear artificially thin, making it difficult to negotiate rates with clients or assess true operational efficiency.

For Professional Services Firms: Inability to separate billable expenses from operating costs makes it impossible to calculate true hourly rates, client profitability, or project margins.

Real-World Example: A Corporate Services Firm’s Journey

Let me share a real case study from our consulting practice (client name changed for confidentiality):

The Client: A business registration and corporate services firm in Victoria Island, Lagos, with 8 staff members and about 150 active clients annually.

The Problem: They were regularly paying CAC registration fees, annual returns filing fees, SCUML registration costs, and various statutory charges on behalf of clients. They recorded all these payments as “Professional Fees” and “Statutory Charges” expenses in Zoho Books. Over 12 months, they had paid ₦8.4 million on behalf of clients.

The Impact:

• Their P&L showed ₦8.4 million in professional and statutory expenses
• Net profit was understated by ₦8.4 million (they had billed clients and recovered all amounts)
• Their expense ratio appeared to be 73% when it was actually 48%
• The managing partner was convinced the business was barely profitable
• They almost turned down a growth opportunity because “margins were too thin”
• Two potential investors walked away after reviewing the financials
• Their bank declined a working capital loan citing poor profitability

The Solution: During our Zoho Books implementation review, we:

1. Created a “Client Recoverable Expenses” current asset account
2. Used Journal Entries to reclassify the ₦8.4 million from Professional Fees/Statutory Charges expense accounts to the recoverable account
3. Linked each reclassified expense to the corresponding client invoice that had already been raised
4. Cleared the recoverable account against the invoice payments already received
5. Set up sub-accounts for major clients to track individual balances
6. Trained the accounting team on the proper workflow for all future client-related payments
7. Created standard operating procedures and a checklist
8. Set up monthly reconciliation processes

The Result:

• Net profit increased by ₦8.4 million with no additional revenue—true profitability revealed
• True expense ratio revealed to be 48% (very healthy for their industry)
• Managing partner gained confidence to pursue the growth opportunity (they hired 3 more staff)
• Successfully secured the bank loan after presenting corrected financials
• Re-engaged with investors who were initially interested—deal closed 6 months later
• Team now has clear procedures for handling client-related payments
• Monthly financial statements now accurately reflect business performance
• Can now properly analyze profitability by service type and client segment
• Pricing strategy revised based on accurate cost data—margins improved further

The managing partner’s feedback: “We thought we were doing okay but struggling. Turns out we were actually doing great—we just couldn’t see it because our accounting was wrong. This one correction changed everything about how we see and run our business.”

Best Practices for Managing Client Recoverable Expenses

1. Create Clear Naming Conventions

When recording expenses paid on behalf of clients, use consistent descriptions that make tracking easy:

• Format: “[Client Name] – [Type of Fee] – [Reference] – Recoverable”
• Example: “Dangote Industries – CAC Annual Returns – Ref: AR2024/001 – Recoverable”
• Example: “Prime Properties Ltd – Lagos Land Use Charge – Plot 45 – Recoverable”
• Example: “TechStart Innovations – NOTAP Registration – Invoice #2024-156 – Recoverable”

This naming convention allows you to:

• Quickly identify recoverable expenses in reports
• Link expenses to specific client invoices
• Search and filter effectively
• Maintain clear audit trails

2. Track Each Client Separately (Advanced Option)

If you regularly pay expenses for multiple clients, consider using Zoho Books’ sub-accounts feature to create individual tracking:

Main Account: Client Recoverable Expenses (Current Asset)

Sub-accounts:

• Client Recoverable – Client A Ltd
• Client Recoverable – Client B Plc
• Client Recoverable – Client C Industries

This structure gives you instant visibility into:

• Outstanding recoverable amounts per client
• Which clients have pending reimbursements
• Aging of recoverable expenses by client
• Total exposure across your client base

When to use this: If you’re a corporate services firm, real estate agency, logistics company, or any business regularly advancing significant amounts for multiple clients.

3. Bill Clients Promptly

Don’t let recoverable expenses sit in your books for extended periods. Create a billing discipline:

• Same day billing: For statutory fees and immediate reimbursables
• Weekly batching: For smaller recurring expenses
• Project completion: For project-based recoverable costs
• Maximum 30 days: Never let recoverable expenses age beyond a month without billing

Why prompt billing matters:

• Reduces the risk of forgetting details or losing documentation
• Minimizes disputes with clients (memories fade, agreement erodes over time)
• Improves cash flow (the sooner you bill, the sooner you recover)
• Keeps your Balance Sheet clean and current
• Makes month-end reconciliation easier
• Reduces the risk of writing off unrecoverable amounts

4. Reconcile Monthly Without Fail

Every month-end, run a comprehensive reconciliation of your Client Recoverable Expenses account:

Monthly Reconciliation Checklist:

1. Export a detailed report of the Client Recoverable Expenses account
2. Identify all outstanding balances (amounts paid but not yet billed)
3. Identify all billed amounts awaiting payment
4. Review aging—flag any items older than 30 days
5. Follow up with clients on pending invoices
6. Investigate any discrepancies or unexplained balances
7. Verify that the account balance matches your expectations
8. Document any write-offs or adjustments needed
9. Update your recovery timeline and cash flow projections

Red flags to watch for:

• Balances older than 60 days without client billing
• Duplicate postings for the same client expense
• Recoverable amounts that don’t tie to any client invoice
• Clients disputing recoverable charges
• Growing balances month over month without corresponding invoicing

5. Document Everything Religiously

Attach supporting documents to every expense recorded in Zoho Books—this is non-negotiable:

Required documentation:

• Receipt or invoice from the vendor/government agency
• Client authorization email or signed agreement
• Payment confirmation (bank statement, transfer receipt)
• Relevant correspondence showing client requested the service
• Engagement letter or contract clause mentioning reimbursables

Why this protects you:

• Prevents client disputes (“I never asked you to pay that”)
• Provides audit trail for tax authorities
• Supports your position in case of legal disputes
• Makes handover easier if staff changes
• Facilitates reconciliation and verification

6. Set Up Approval Workflows

For larger organizations, implement approval processes before paying expenses on behalf of clients:

Suggested workflow:

1. Request: Client services team requests payment on client’s behalf
2. Authorization check: Verify client has authorized this expense
3. Amount verification: Confirm the actual cost with the vendor
4. Financial approval: Finance manager approves the advance
5. Payment: Accounts payable makes the payment
6. Recording: Expense posted to Client Recoverable account
7. Billing trigger: Automatic reminder to bill client within 7 days

7. Use Zoho Books’ Billable Expense Feature

Zoho Books has a built-in “Billable Expense” feature that can streamline this process:

How to use it:

1. When recording the expense, check the “Billable” checkbox
2. Link the expense to the specific customer
3. Post it to the Client Recoverable Expenses account
4. When creating an invoice for that customer, Zoho Books will show you all unbilled expenses
5. Click to add them directly to the invoice
6. The system automatically links the expense to the invoice for perfect tracking

This feature helps you:

• Never forget to bill a client for recoverable expenses
• Maintain perfect linkage between expense and invoice
• Generate reports showing billable vs. billed expenses
• Track recovery rates and outstanding reimbursables

8. Review and Adjust Your Fee Structure

If you’re frequently paying expenses on behalf of clients, consider:

• Service charge: Add a small handling fee (5-10%) to recoverable expenses
• Retainer model: Require clients to maintain a deposit for anticipated expenses
• Direct payment: Educate clients to pay statutory fees directly when possible
• Credit terms: Clear payment terms for reimbursable expenses (e.g., due within 7 days)

This protects your cash flow and compensates you for the administrative burden and financial risk of advancing funds.

Industry-Specific Implementation Tips

For Real Estate Agents & Property Consultants

• Create sub-accounts by property type (residential, commercial, land)
• Link each expense to a specific property transaction reference
• Include property address in all expense descriptions
• Reconcile against your property transaction pipeline
• Consider having clients pay statutory fees directly to reduce your exposure

For Corporate Services & Business Registration Firms

• Create templates for common recoverable expenses (CAC fees, annual returns)
• Set up standard pricing for different registration types including reimbursables
• Maintain a tracking sheet linking CAC reference numbers to Zoho Books transactions
• Bill immediately upon receipt of CAC certificate or completion document
• Consider a service charge for express filings or urgent processing

For Payroll & HR Companies

• Separate recoverable expenses by client company
• Reconcile monthly against payroll runs
• Include pension remittance confirmations as supporting documents
• Bill recoverable expenses with each payroll cycle
• Consider whether certain costs should be built into your service fee rather than passed through

For Logistics & Freight Forwarding

• Link each expense to a specific bill of lading or shipment reference
• Attach customs documentation to all duty payments
• Reconcile against your shipment tracking system
• Bill immediately upon cargo release
• Consider requiring advance deposits for high-value shipments

For Professional Services (Legal, Accounting, Consulting)

• Link recoverable expenses to specific matter or engagement numbers
• Include reimbursables in your engagement letters with clear terms
• Bill recoverable expenses with your regular fee invoices
• Consider markup policies that compensate for administrative burden
• Track recovery rates by client to identify payment issues early

Common Mistakes to Avoid

How BMC Can Help

At Brattle Multiconcepts Consult, fixing these kinds of structural accounting errors is part of our core service offering. Whether you’re using Zoho Books, QuickBooks, or Sage 50, we ensure your accounting setup reflects proper accounting principles.

Our Approach Includes:

• Accounting Health Check: We review your current setup and identify all areas where recoverable expenses are being misposted
• Chart of Accounts Restructuring: We create the proper account structure for your specific business type
• Historical Correction: We reclassify past transactions to give you accurate historical financials
• Workflow Documentation: We create standard operating procedures specific to your industry
• Team Training: We train your accounting staff on proper expense recording
• Ongoing Support: We provide monthly review services to ensure continued compliance

Learn more about our comprehensive accounting and bookkeeping services, including implementation support for Zoho Books, QuickBooks, and Sage 50.

Who Should Work With Us:

• Real estate agencies handling multiple property transactions with statutory fees
• Corporate services firms doing high volumes of company registrations
• Professional services firms (legal, accounting, consulting) with significant client reimbursables
• Logistics companies advancing customs duties and port charges
• Any business where recoverable expenses represent more than 10% of monthly outflows
• Businesses preparing for investment, loans, or audit who need clean financials

Understanding Money Received on Behalf of Clients: The Other Side of the Coin

While we’ve focused extensively on expenses paid on behalf of clients, many businesses also handle the reverse situation: receiving money on behalf of clients. This is equally important to get right and involves similar accounting principles.

Common Scenarios Where Businesses Receive Money on Behalf of Clients:

The Correct Accounting Treatment for Money Received on Behalf of Clients

When you receive money that ultimately belongs to someone else (client, landlord, employee), you must treat it as a liability, not revenue.

Real-World Example: Property Management Company

Scenario: You manage 10 properties. This month, you collected ₦5,000,000 in rent from tenants. Your management fee is 10% (₦500,000).

WRONG Approach (that many businesses use):

• Record ₦5,000,000 as Revenue (WRONG!)
• Record ₦4,500,000 remittance to landlords as Expense (WRONG!)
• Net “profit” shown: ₦500,000 (correct amount, but wrong presentation)

Why this is wrong:

• Your revenue appears to be ₦5,000,000 when it’s actually ₦500,000
• Your expenses appear to be ₦4,500,000 when it’s not an expense at all
• Your financial ratios are completely distorted
• Tax computations may be affected
• Lenders and investors see inflated turnover with thin margins

CORRECT Approach:

1. When rent is received:
   • Debit: Bank ₦5,000,000
   • Credit: Property Owner Funds (Liability) ₦5,000,000
2. When remitting to landlords:
   • Debit: Property Owner Funds (Liability) ₦4,500,000
   • Credit: Bank ₦4,500,000
3. When invoicing your management fee:
   • Debit: Accounts Receivable (or reduce liability if deducted from rent) ₦500,000
   • Credit: Management Fee Income ₦500,000

Result:

• Revenue correctly shown as ₦500,000 (your actual earnings)
• No false expenses recorded
• Balance Sheet correctly shows liability while holding client funds
• Financial ratios are accurate
• True business performance is visible

Payroll Outsourcing Example

Scenario: Client Company X outsources payroll to you. They transfer ₦10,000,000 for employee salaries. Your processing fee is ₦200,000.

CORRECT Accounting Flow:

1. Receive client funds:
   • Debit: Bank ₦10,000,000
   • Credit: Payroll Funds Held (Liability) ₦10,000,000
2. Pay employees’ salaries:
   • Debit: Payroll Funds Held (Liability) ₦9,800,000
   • Credit: Bank ₦9,800,000
3. Invoice your processing fee:
   • Debit: Accounts Receivable ₦200,000
   • Credit: Payroll Processing Income ₦200,000
4. Receive payment of your fee (or deduct from liability):
   • If deducted from funds held:
   • Debit: Payroll Funds Held ₦200,000
   • Credit: Accounts Receivable ₦200,000

Final position:

• Your revenue: ₦200,000 (correct)
• Client funds liability: ₦0 (cleared after all payments)
• No false revenue or expenses distorting your books

Key Principles for Both Scenarios

Transaction Type	Use This Account Type	Example
You pay on behalf of client (to be recovered)	Current Asset	Client Recoverable Expenses
You receive on behalf of client (to be remitted)	Current Liability	Client Funds Held
Your professional fee/commission	Income/Revenue	Service Income, Management Fees
Your actual business costs	Expense	Salaries, Rent, Utilities, etc.

Critical Compliance Note for Nigerian Businesses

Several Nigerian regulations specifically address holding client funds:

• Legal Practitioners: Must maintain separate client accounts per Legal Practitioners Act
• Property Managers: Should maintain separate accounts for rent collections per best practice
• Payroll Companies: Must ensure proper fund segregation to protect employee payments
• All Businesses: Commingling client funds with business funds can create legal liability

While Zoho Books doesn’t create physical separate bank accounts, proper accounting treatment with dedicated liability accounts ensures clear tracking and compliance with fund segregation principles.

Complete Framework: Expenses Paid vs Money Received on Behalf of Clients

Why Professional Implementation Support Matters

These accounting principles might seem straightforward in theory, but implementation requires:

• Industry-specific customization – Real estate accounting differs from payroll accounting
• System configuration expertise – Setting up Zoho Books correctly the first time
• Historical data correction – Fixing past mispostings without creating new errors
• Staff training – Ensuring your team understands and follows the correct procedures
• Ongoing compliance – Regular reviews to catch and correct errors early

This is where professional support from firms like Brattle Multiconcepts Consult becomes invaluable. We don’t just set up software—we ensure your accounting reflects economic reality.

Final Thoughts: Clean Books Start With Correct Thinking

Whether you’re paying expenses on behalf of clients or receiving money on behalf of clients, the fundamental principle remains the same: money that isn’t economically yours should never touch your Profit & Loss statement.

This isn’t just about technical accounting compliance—it’s about having financial statements that truly reflect your business performance. When your books are clean and accurate:

• You make better business decisions based on real data
• You can accurately price your services
• You understand your true profitability
• You present credible financials to lenders and investors
• You avoid tax complications and regulatory issues
• You sleep better knowing your numbers are right

At Brattle Multiconcepts Consult, we’ve seen the transformation that happens when businesses move from confused, distorted accounting to clean, principle-based bookkeeping. The difference isn’t just in the numbers—it’s in the confidence, clarity, and control that comes from truly understanding your business.

Don’t let improper accounting hold your business back. Whether you need help implementing Zoho Books, QuickBooks, or Sage 50, or you simply need to clean up years of incorrect postings, we’re here to help.

Because clean books start with correct thinking—not just correct clicks.

Watch Our Video Tutorials

For visual learners, we’ve created detailed video tutorials that walk you through these concepts step-by-step in Zoho Books. Check out these resources on our YouTube channel:

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Related Resources from BMC

Expand your accounting knowledge with these related resources:

• Our Complete Service Offerings – Discover how we can help your business with accounting setup, training, and advisory
• Zoho Books Implementation Services – Professional setup and configuration for Nigerian businesses
• QuickBooks Implementation in Nigeria – Full-service QuickBooks setup and support
• Sage 50 Implementation Services – Expert Sage 50 deployment and training

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