I pay both my vehicle & PL insurances on separate monthly DDs.Up until now I have just been entering the payments each month by debiting the bank account with a Class Code of Insurances.The dates of insurance renewal do not coincide with my trading year date.
It has occurred to me after reading up on accruals on the Forum that perhaps what I should be doing is creating a Purchase Account for each on the insurance companies, entering the yearly amount of the premiums (with a Class Code of Insurances) into these accounts and then each month enter a payment which debits the bank account and credits the relevant companys Purchase account.This would allow me to see the outstanding amount at any one time and also correctly transfer the outstanding balance at year end to the next year.It would also, I assume, show the correct amount of insurance in the P&L.
I should point out that I use Money Manager Business Edition for my accounts so the terminology that I have used above regarding debits & credits are, I believe, opposite to standard accounting practice but are correctly dealt within the program.MMs debit & credit system is easier for my poor addled brain to cope with!
I'm not familiar with Money Manager, but unless the payments are 1/12 of the premium (unlikely) then what you have described sounds ok. But you will need to post prepayments at the year end for the value of the premium which relates to the next year. Otherwise your P&L will show too much in Insurance.
There are 2 ways of dealing with this, both mentioned by yourself.
1) you can load the full invoice in the supplier account and then reduce the amount owed with the monthly standing order/Direct Debit
2) continue loading the monthly payment only.
Both are correct if paying over 12 months or for whatever period the invoice relates too.
However the issue arises when you say pay 10 months for a 12 month invoice period as Annepebo says, such as some car insurance or Council Tax
the only problem with loading the full invoice is that you will get a distorted monthly profit & loss (if you do monthly figures) as it will all show in one month only unless you do the accruals and prepayments each month and then reverse which just creates more work for you.
In your case I would carry on using the monthly payment method then if there is any overlap at the year end, make the adjustment in your year end accounts.
Just seen this and you may have already found this solution. Have a look at the C-E Closing Entries function on Final Accounts for period end adjustments. You can do debits or credits there and this saves you using a purchase ledger.
Regards, Tim
-- Edited by Don Tax on Friday 22nd of July 2011 06:42:18 AM
