Invoice posting query. Accruals/Prepayment. End of Year (2024)

Hi all. I'm having a dodgy brain, lack of sleep day.

Im doing the books for a company and some end of year stuff for the accountant. This year they are working on manual books, but I'm moving it all to spreadsheet for 11/12. The accountant has said I could have ago at the a&p's and what have you. I'm also looking at listing o/s creds and debs.

So I'm used to seeing cash books and generally that's it. Other parts of the end of year process are hazy to me and need piecing together. I have read up quite abit in the past, but through never applying in work, the knowledge disperses! So I'm trying to think bigger picture in Sage and PL BS etc.

Year End is 28 Feb. I have an invoice with tax point 18/2/11 for services to be provided between 1/3/11 and 31/3/11. Now the accountants won't see this invoice because it's a DD paid on the 1/3 and therefore filed away in a folder for the new tax year. (All invoices are filed in the month they are paid. So a Dec inv for Dec services received not paid till Mar would be in next year's file.) I'm doing a spreadsheet with all suppliers and working through it noting a&p's or/and outstanding creds accordingly.

Now because this 18/2 inv is for the next acc period and also paid in the next, the acc doesn't need to know, am I right? But it's an outstanding creditor because it's been invoiced. But some o/s creds would be for future periods (short and long term) and some for the period gone. How are these taken into account for the PL?

However, if we were using Sage, which I have done an entry level course on, how would you deal with this invoice? As soon as you receive the invoice, it is added to the system with the tax point date yes? But what acc's would this be posted to when it refers to another period and hasn't yet been paid? Then what would you do afterwards?

Thanks very much for the help. I know it's long with multiple questions, but i would really appreciate the help and a little fleshing out if possible. I feel I'd be able to work through and research this using what I know usually, but seriously bad sleeping patterns ruin the brain, and trying to restore good sleeping patterns after years of dodgy ones...well!

Working upon the accrual basis, I would record the invoice as normal dated 18/02/11 and 'prepay' the charges to the next financial year (Cr Creditors, Dr Expense; Cr Expense, Dr Prepayments). Knowing that it will be paid by direct debit on 01/03/11 would strike me as irrelevant as this is cash accounting. Please excuse me if I am wrong, just my thinking. In effect the charges relate to the next financial year in all but right (period and payment date) but you've received the invoice in this period and the invoice must be recorded as you have the notification. As an example, if you received a rent invoice dated 01/02/11 for the period 01/02/11-30/04/11 and paid it on 01/03/2011, how would you treat the further two months?

www.bensteadbook-keeping.co.uk

Hi Dean. Thanks for your reply at this graveyard hour! I'm still working away.

In your example if I worked with nominal accounts and Sage I think I would do the following:

01/02/11 Cr Creditors for full value, Dr Expense full value; Cr Expense for Mar&Apr 61 days worth, Dr ? 61 days. (what would you Dr, because as yet nothing has been paid?)

01/03/11 Cr Bank, Dr Creditors; Cr ? 61 days , Dr Prepayments 61 days; Then Cr Prepayments 31 days, Dr Expense 31 days.

01/04/11 Cr Prepayments 30 days, Dr Expense 30 days

So I'm thinking of releasing the money as and when it should be. But am I way off with the above, is it a lot simpler? (and if I was to release it like that; technically should it not be setup to be released daily, incase accounts were required mid month?)

Thanks for your time Dean!!

The accrual & prepayment concept ensures the matching of revenues and costs in the relevant period. so if you receive an invoice in advance of goods or services you would need to record in prepayments (cr expense dr prepayment then reverse in the corect period) , if you incurr an expense but do not receive the invoice until the following period you would need to accrue for that expense (dr expense cr acruals).

I think you have confused the concept of matching revenues andcostsin your accounts with the physical payments made. When the invoice is paid in irrelevant to the recording of the transaction in the accounts. It also follows then that creditors is unaffected by either prepayments or accruals.

Shaun UK wrote:

Year End is 28 Feb. I have an invoice with tax point 18/2/11 for services to be provided between 1/3/11 and 31/3/11. Now the accountants won't see this invoice because it's a DD paid on the 1/3 and therefore filed away in a folder for the new tax year.

________________________________________________________

Hi Shaun

In this example, I agree with you and I don't think you need to show it in the accounts to 28.02 at all. It's neither an accrual nor a prepayment.

You could argue that the suppliers tax point is incorrect as the invoice isneither paid nor has the service been provided.

imho...

Tony

Responses are intended asoutline only. Formal advice should be sort from your Institutes Technical Department or a suitably qualified Accountant.

.

Thanks Anne and Tony for your responses, much appreciated. I've got a few more questions, if you and the community have the time to give me your take on one or all I'd be grateful.

* In Anne's first paragraph with regards to prepayments, "Cr Expense and Dr Prepayment" is mentioned. I take it Cr Supplier and Dr Expense is necessary 1st? Whereas in the 2nd example of accruals only Dr Expense and Cr Accrual is necessary?

* From the response, I think Anne is right saying;I think you have confused the concept of matching revenues andcostsin your accounts with the physical payments made. When the invoice is paid in irrelevant to the recording of the transaction in the accounts.

I thought that a prepayment was something when you have actually paid ahead of the product/service. But are we saying that invoices I receive with a tax point date in the accounting period, but with a service date outside...even if not paid, I should be posting to prepayments? Nothing has been paid for, so there is no asset to report on the BS? When doing accounts and tax liability, does the accountant just work with this looking through prepayments for this sort of issue?

* Would you mind expanding a little on this point;It also follows then that creditors is unaffected by either prepayments or accruals.

* A question about Outstanding Creditors mentioned on the BS. This figure is gathered from invoices received but not paid isn't it. Is it affected by a transaction with an invoice date inside an acc period, but tax point date outside? So when someone looks at o/s creds on the BS, they're looking at the creds at that particular point in time, not getting an idea for how that the imminent expenditure matches to a fixed period...?

* Tony, you agree with me in my circ*mstance. As I say for this business I'm working on manual cash book only, not posting to double entry accounts. So the accountant only needs to see relevant information for his purposes of calculating 10/11 tax liability and correct accounts.

- Would you say it would be different if I was working on Sage, should I then be posting it? I can see in a company with large amounts of transaction data to process you would need to post invoices as soon as received.So in this instance would you process the invoice 18/2 when received with an amended date of 1/3, making sure the credit period is adjusted accordingly?

Thank you so much for your time. Again lots of questions, but it would really help my overall understanding and give me a bit more confidence going forward if I could get the right understanding.

Hi Shaun,

* dr expense cr supplier is needed first, otherwise you may end up a negative expense. As you mentioned an accrual doesn't affect creditors because both Creditors and Accruals are liabilities, so in that respect it's the same.

* I view prepayments the same as you, in that they relate to physical payments made to suppliers which relate to services provided in the next accounting period. Prepayments are a current asset and trade creditors are a current liability.

* ...

* I do. It looks like the accounts are being prepared on a cash basis. In this instance the invoice isn't paid so I'd ignore it.

* I wouldn't treat it differently in Sage, I'd just ignore the invoice in the current financial year.

Tony

Responses are intended asoutline only. Formal advice should be sort from your Institutes Technical Department or a suitably qualified Accountant.

.

Thanks Tony for that, much appreciated.

I'm unsure of whether the accounts/tax are being prepared on a cash basis. Businesses have to get rare special dispensation from HMRC for this don't they. So I don't know in the past what the case was. Although at one stage this business, now a partnership, was a limited company. So even more so I would guess from the ltd days that accrual accounting is the procedure, as changing back surely wouldn't be acceptable. Do you think I'd be somewhat right in assuming this? Yes the filing is effectively on a cash basis, but otherwise?!

So on the Sage point just to clarify, are you saying that 'A' you would post it 18/2, but in your analysis and preparation of accounts/tax ultimately see that it's for a different period and ignore it? Or 'B' just don't post it until the new tax year 1/3?

Cheers!

A lot of my questions come from me wanting to learn outside the box. But also the manual, non double entry methods of my work at the moment give rise to queries about the bigger picture. I'm looking for more work and know that some of what I'm doing now would be different in another position, whether that be just purchase/sales ledger, in Sage or otherwise, or a more encompassing bookkeeping role including tb's etc. I've taught myself what I know up to now through research, tuition websites, HMRC's BIM and other books. One of the tougher things was getting my head round the differences between particulars as they relate to either accounts, or taxation! Anyway... I waffle on!

Thanks Tony.

Hey some nice hot discussions going on here. Am I permitted to participate?

Singapore Company Registration

Hi Bryan,

of course, your encouraged to. That's what the forums all about.

Feel free to agree, disagree, post alternatives, etc.

I look forwards to reading your posts,

kind regards,

Shaun.

Shaun

Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.

Healthy debate is essential isn't it? I find it the best way I learn.

I'm not 100% certain what you mean Bryan but I would like to say I respect everyone's opinion here. If the tone of my posts are blunt and opinionated, then I'd like people to know it's never my intention to offend anyone.

Tony

Responses are intended asoutline only. Formal advice should be sort from your Institutes Technical Department or a suitably qualified Accountant.

.

Hi Tony,

my impression was just that Bryan hasn't joined any of the threads before so just doesn't know if there is any site ettiquette for joining in discussions.

I wonder how many others out there read the threads with an opinion but feel that those of us who are on here a lot just talk to each other which of course is not the case. Everyone's opinion matters and just because everyone else argues a point from a different angle doesn't mean that your opinion isnt the right one. Speak up, give your reasoning and join in the debates. Arguing a point through is the only way to really fully understand it. (thinks, should I start a debate about Hedge Accounting? all this fair value hedge and cash flow hedge study is really doing my head in).

Personally I can't see how anyone would take offence at any of your posts Tony.... So you must try harder! (lol).

Shaun

Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.