I've run into an unusual situation (for me) and I'm keen to know if anyone has experience of this and what they did?
I'm doing the bookkeeping for one of my clients who provides professional services on a monthly basis and normally charges a fee every month (issuing an invoice per month). He requests a few of his clients to pay the fees for the whole year in advance, so he issues one invoice and then delivers the work over the next 12 months.
My question is about how I should record this in the books? When I record the invoice I charge the whole invoice amount to "Sales", but this would show as a big sale for the month and then nothing for the remaining 11 months. Should I use 'prepaid income' to spread the income from sales over the 12 months after recording the invoice? I know there are rules about the tax point of a supply so I'm unsure how to proceed.
This is not a big problem within the same financial year, but the 12 months of his service spread across two financial years so I'd like to make sure that it is correct to 'suspend' a portion of the income to be accounted for in the next financial year for the months that fall in it? This clearly has implication on his tax bill for the year.
Any guidance is greatly appreciated. :o)
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Boomerang Bookkeeping
Fixed-fee Bookkeeping Solutions for Small Businesses from £15 per month.
If the invoice is to supply services for a 12 month period then i would prepay the income eg say invoice is for £1200 for the 12 to 30 June 2012. The invoice is raised on 1 July 2011 and the year end is Dec 2011. You will prepay £1100 in July 2011
Dr Sales £1100
Cr Prepaid Income/Accruals £1100
and each month thereafter release £100 to the profit and loss as sales. So at the end of the financial year you will have £600 in sales and £600 prepaid income in the balance sheet as a liability to be released at £100 per month over Jan 2012 to Jun 2012.
This follows the accruals/matching concept in which income should be matched against the costs it relates too. Will also help with personal/corporatoin tax bill as the sales for the year will be reduced and thus the tax bill will be reduced also.
If VAT registered, the VAT should be declared on 1 July 2011 when the invoice is raised.
thanks a lot for the prompt reply. My concern was about the tax bill for the year being affected by the portion of sales being moved to the following financial year. Now I understand this is ok, though.
Thank you.
Fabs
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Boomerang Bookkeeping
Fixed-fee Bookkeeping Solutions for Small Businesses from £15 per month.
As long as the income relates to next year there is nothing against you deferring the income until next year and then pay the tax on that years results.
It is the same as accrued costs were you have incurred costs in the year but not been invoiced for them until the following year. Therefore you accrue the costs into the period they relate too (not to when the invoice is dated) so you get tax relief in the period when you incurred the cost.
