I can't get my head round this and I'm missing something blatantly obvious I know.
Take a situation when are invoice received on 1st January 2010 for an expense which covers the period January 2010 to September 2010. This is then paid by nine monthly instalments. The year ends on 30th June 2010. How is this treated to split the expense over the two periods?
I know how to treat it if it was paid in advance without an invoice. Or if it was owing at the year end and the invoice hadn't yet been received. But I can't figure it out for something that spans two periods and an invoice has been received.
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Never buy black socks from a normal shop. They shaft you every time.
Surely its neutral, you would have a liability of 3 months, assuming it is non canellable
You would then have a prepayment of 3 months worth.
The effect on the P&L is nil, it would be up to you how you record it in the Balance sheet. I personally wouldn't bother and would just record the monthly amount straight to the P&L.
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Phil Hendy, The Accountancy Mentor
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Gas was on a monthly VAT invoice at £400 a month, which was fine by me, i didn't need to use prepayments or accruals...then the DDs started bouncing and no electric got paid for a few months then a 6k bill arrived.... not sure how to go about the accrual as the DDs hit some months and not another
e.g.
may 400 June 400 July 0 Aug 0 Sept 400 oct 0 nov 6k bill 0 payments
(this is not exactly how it went but gives you the rough idea)
shall i put the whole lot to accruals and put an amount back each month, or fill in the gaps at 400 and then split the rest?
Are you saying that the invocie in question should not be posted but paid as you go??
The invoice should be posted and will show in your creditors balance until paid off. However the full cost will have been posted on your P&L, so you will need to post a prepayment journal at the end of whatever period to get the correct P&L entry.
never been done, i started with a 4 month backlogue and have been playing catch up ever since (while also learning what to do, as i have no bookkeeping training!)
i am in a position now where i want to get monthly management accounts and try to keep everything running smoothly!
Would you suggest taking the total and spreading it across my period (may- nov)?
Are you saying that the invocie in question should not be posted but paid as you go??
The invoice should be posted and will show in your creditors balance until paid off. However the full cost will have been posted on your P&L, so you will need to post a prepayment journal at the end of whatever period to get the correct P&L entry.
Or am I missing something?
P
Like I said, two different ways to get to the same answer!
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Phil Hendy, The Accountancy Mentor
Are you thinking of setting up your own practice or have you set up and need some help?
If so a mentor may be the way forward - feel free to get in touch and see how I can assist you.
I would not worry about what went on previously but moving forward, I would ensure if doing monthly man accs that the correct amount goes in to each month, so may need either an accrual or prepayment.
I've got a similar problem with a SageCover insurance and got really puzzled. We receive a SageCover invoices UPFRONT for the 12 month period but are paying them monthly by D/D. The Invoice date is 7th November. Year end is 31 March. The way I was posting it in Sage is as follows:
(Let's assume the Invoice amount is £432.00, i.e £36.00 p/m)
1. Post a Supplier's Invoice:
Dr Accruals <-- Cr Supplier £432.00
2. On a monthly basis:
Dr Insurance <-- Cr Accruals £36.00
3. At the Year End I have an obvious problem: My Accruals A/c has a DEBIT BALANCE, which doesn't look right, Or Does it?????
Guys, please HELP. I've got couple of a similar invoices (i.e.Car Insurance) and am stuck!. Some members saying in your post below that it should be treated as a Prepayment, and it confused me completely.-
Accruals are for things which you use but have not yet paid or been billed for. That's not this situation because you are billed in advance. You want a Prepayment.
If you get the invoice in November and start paying them in the same month, then that's five month's worth of that invoice that should be put to this financial year, and seven to next:
Dr Insurance 180 + Dr Prepayment 252 == Cr Supplier 432
Thank so much for the clear answer, Rob. I always though that "Prepayments" are literally for the things we PAID in advance, but it looks like not only. Now we will have an increase in Current Assets, is this right?
Yes, the Prepayment current asset is the worth of the insurance that you are due in the following tax year.
Prepayments with actual payments would be exactly the same as above, but with "Bank" instead of "Supplier" (and no monthly payment transactions either, of course).
Thank you Rob for your help, now I understand the point with "Prepayments", which means their (Sage) obligation to provide Sagecover for the next 7 months (after y/e) is our current asset.
You proposed to post the 5 month's value of the insurance policy at once, but if we want to see the correct expense figure at the end of each month can I follow this route:
1. Invoice ( in November) :
Dr Prepayments <-- Cr Supplier (trade creditors) £432.00
2. Each month:
Dr Bank <-- Cr Supplier £36.00
Dr Expense (insurance) <-- Cr Prepayments £36.00
In my opinion, by posting journals this way, we won't need a reverse entry at the beginning of a new period (month/year). Please do comment on this.
Sorry for the delay in replying, I was away at the weekend.
You initially implied that you were only interested in year-end figures. Of course you can prepay all but the current month in order to get correct monthly figures, and then with a monthly period you'd have to do as you suggest each month (the second part of step 2 at the start of each month, and the first part on the D/D date), but do you really need to?
You see, prepayments and accruals are usually only needed to be thought about when either they are created, or at the period border. The way you suggest means that you'll have to remember each month to knock off some of the prepayment to the expense account. Are you sure you, or someone doing your work if you're off ill, will remember? Are you sure you or they will do that for *every* invoice which covers more than one financial year, because you're going to be consistent and do this for *all* prepayments and accruals, yes?
Plus, you're adding 12 extra entries for the sake of saving two?
Finally, if someone were to look at the balance of the Prepayments account before the year end, expecting annual figures, they would see a much larger figure than is accurate in the next financial year. This might affect budgetary decisions, etc. You never know.
So you need to find out what your reporting requirements are. Monthly or annually? Both? If it's just annually, I wouldn't make extra work for yourself and introduce more places where errors could occur.
One suggestion if more than just annually was required might be to have a second Prepayments account, intended for monthly figures within the current financial year. That then will separate out prepayments on a monthly basis as you suggest, but keep the financial years distinct.
By the way, me calling it a "reverse" entry doesn't mean that the original entry was a mistake, all I was saying was that the two entries removes the prepayment in the first year, and adds it back in the second. They are equal and opposite.
Once again, THANK YOU VERY MUCH indeed. Your answer was very informative and helpful and I hope many readers will benefit from this.
The "consistansy" is really something to keep in mind as well as efficiency. How do I remember to post all journals on a monthly basis? I don't. The Sage does. I simply use the recurrent transacrions feature in Sage. When the invoice or policy (which covers a large period) received, I simply set up a recurring transaction in Sage and it reminds me each month on the date I set and posts the journals automatically with the same reference.
However, after reading your reply it makes me re-think my approach again.
