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?

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 and costs in 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.

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 and costs in 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 circumstance. 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.

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.

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.