I have been looking into different ways that bookkeepers and accountants in practice collect their fees and I have come to the conclusion that monthly ongoing fees is the way to go.
My question is: if I collect fees on a monthly basis for a client that I will complete accounts and tax once per year and I get say 50 clients, then I will have generated a potentially very large deferred income pot. As this is a liability in my records, would the experienced ones out there recommend adopting this menthod or stick to payment on comepletion - which seems to be the old school choice.
I haven't yet chosen on standing orders or the alternatives yet, but understand that this is another thing to consider.
As not all clients can be guaranteed to make it to year end and even when they do, getting payment can at times be like getting blood from a stone, go for payment throughout the year and think of it differently. i.e. as ongoing payment for services rather than as instalments of a set amount.
Note that an accrual only occurs where there is an obligation to perform (and through that an expectation of payment). The obligation is created either by payment, published policies (such as your engagement letter) or accepted past practice.
If by past practice work is performed for clients regardless as to when payment is made then you have a constructive obligation to perform and therefore a liability and deferred financial asset (accrual) exist.
If it is clear to the clients that their ongoing payment creates the obligation to performance then there is no accrual as income is only deferred to the extent that it is actually owed to you.
As noted above, there will invariably be an element of accruals and prepayments but they don't need to be to the extent that you are thinking here as they only exist where there is an obligation to perform, (constructive or otherwise) and only that obligation can create an expectation of payment for services.
Note that in the above I am talking about a liability to perform as opposed to a financial asset with regard to the accrual although both of course exist in equal measure.
HTH,
Shaun.
__________________
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.
I hadn't thought about the contract side of things, but I agree with your comments if the letter of engagement detailed that it was for monthly services and not an actual item of work i.e. Set of Accounts or a Tax Return.
I can see a potential problem that may arise from this method in that if a client had paid say 8 months and they decided to leave, they may ask for a refund as I had not completed any actual (material) work - although I do accept per your post, I was available for the services agreed for the period concerned.
How would you deal with this situation? Partial refund, full or nothing...
The client has paid for a service that they have decided not to take thereby breaking the contract from their side. Just make tsure that you get the wording right in your initial engagement letter and don't try to hide that in small print or an embedded papagraph in an unrelated section of the engagement letter.
If it is made clear that the client is paying for you to work on their behalf throughout the period and that final accounts are something that comes out of that process but they are not paying for that service specifically then they have no comeback.
It would be better for a client to have you file final accounts / tax return and then move accountant rather than then moving before their yearend.
Also note that the client has no rights to your working papers. Legally and ethically you must only supply the clients new accountants / bookkeepers with a copy of the last set of accounts and the trial balance upon which those accounts were based.
Everything else, including your handover time is chargeable to the client or to the new accountants / bookkeepers who will recharge the time to the client.
In reality though whilst we may occassionally lose clients I wouldn't actually do anything to alienate myself from other accountants and bookkeepers as it's very much an I rub your back you rub mine world out there.
__________________
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.
Thanks for your help, this information is invaluable. Now to look into the wording on the letter of engagement to ensure this is watertight in case of any future issues.
