I'm wondering how you might work if you receive the above. What processes do you go through. What do you start with? What documents do you create on the way to acceptable accrual accounting tax return figures?
How does it vary when receiving a manual cash book or computer records?
To make it simple say it's a business who doesn't need monthly accounts so figures only have to be calculated once at year end.
Thanks. I'm bookkeeping for this sort of business and am wondering what processes an accountant goes through. Much appreciated.
all that this is asking for is to to turn the records of a business that records transactions on a cash basis to recognise the transactions as they actually happened, not as the cash was receieved or paid.
For example. An electricity bill paid just after year end will be recorded by the company in the new year but the reality is that the payment refers to expenditure incurred in the previous year so an accruel needs to be shown.
Very basic example I know but I think that it shows the general principle.
For the tax element you have the different between profits shown in the financial statements and the taxable profits which are quite different (for instance depreciation doesn't come into the taxable profits calculation).
Hope that this helps
all the best,
Shaun.
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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.
For the tax element you have the different between profits shown in the financial statements and the taxable profits which are quite different (for instance depreciation doesn't come into the taxable profits calculation).
Cheers Shaun. Yes with the above that's one of the first things I found out early on, which made me aware of the point there are differing processes. It's capital allowance rules on writing down instead for 'depreciating' assets. This is a common difference. Could you give a couple examples of other 'more common' differences.
I'd love to be able to see the process from start to finish where an accountant is dealing with the data for both final accounts but also for taxation purposes.
So Shaun if you received accounts from Sage (or the like) that were cash basis, where would you start? Would you work through each month's individual transactions looking at source docs, making records of the amounts that should be accruals and prepayments instead? Would you just store this in a spreadsheet? Whilst at the same time doing your checking for disallowable proportions etc? I take it you would make no changes to the business' Sage records, keeping records of the amendments yourself.
Thanks Shaun. Sorry it's effectively pretty basic questions, and generally just asking what you do. Any answers are appreciated.
If doing year end accounts you dont need to worry about every month for the year. You just need to be sure that everything is included from an accruals basis at the year end which basically means that your balance sheet has all the necessary assets and liabilities.
Common adjustments would be
1. Ensure depreciation is processed.
2. Ensure any stock/WIP is included
3. Adjust for any prepayments/accruals
4. Ensure debtors/creditors are correct at year end
5. Ensure any outstanding lodgements/cheques are included in bank balance
6. Ensure other creditors include the liability at the year end eg PAYE/NIC, VAT, Hire Purchase, Company Credit Card.
That covers the most common adjustments to turn cash accounts into accruals.
If the data is entered properly then Sage takes care of most of this for you (there will always be some journal entries at year end).
taking Sage out of the equation (as I always try to), the real driver here is the bank rec. When your checking it off against the items to which it relates it will become pretty clear which period the payments and receipts go into from the underlying documentation.
A few to watch out for are things like insurance policies the accrual / prepayment being dictated by the period covered by the insurance policy compared to the company reporting period.
Telephone bills have an element of accrual (calls made) and an element of prepayment (equipment rental)
Utilities will normally be accruals.
Tax differences will be anything that is put through the books that is not allowable for tax purposes (such as goodwill, depreciation, amortisation, impairments, Provisions, some expenses, etc).
There are both permantent and temporary differences. For example, although depreciation is not allowable the depreciation amount is simply reducing the carrying value of the asset at a different rate than is used for capital allowances and AIA often making such simply a timing difference.
I'm sure that you realise, but this area cannot be explained away in a short exchange on the site and any attempt to will like as not give a half cocked answer (as this one feels to me at the moment as I think that I'm simplifying the answer too much).
Assuming that you started down the AAT path that you mentioned in your very first post, AAT should give you a basic understanding of this at intermediate level but full understanding won't come until you do the tax papers at level 4.
As mentioned above this is probably too basic to be of any use but hopefully detailed enough for you to know that there is quite a lot sitting behind how accountants turn the raw data into a set of books, for the correct period, with the correct calculation of tax.
Talk soon,
Shaun.
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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.
Now whilst your response didn't add anything to the thread or even profess to contain any constructive comment itself that one starts off quite well but ends up reading as though you are telling me to keep working.
Which of course you couldn't possibly be as I'm the Managing Director of a debt free company for which I am the majority shareholder. Now when I last checked there were'nt actually any levels above that so you can see where my confussion comes from when you say keep on working.
Sometimes, if like (for example) Bill you earn the respect of all of us here though hundreds of excellent posts passing a comment to concurr agreement carries a lot of credence.
However, if you just post for the sake of it in a manner that comes accross as though your opinion meant something when you have added absolutely nothing to any thread that you have posted in, then people will just see you as a spammer riding on the shoulders of your betters and no matter how many posts you make that is all you will ever be seen as.
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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.
