Hi there
I have a client for whom I prepare his SA. I suspect he may have understated his income as his purchases by far exceed his turnover resulting in a large loss for gross profit and a even bigger one for net profit!
He does his own bookkeeping and is unable to explain the loss. He is also VAT registered.
Can anybody advise me how to proceed with this please?
Many Thanks
Mycroft
Rather than understated income, could it be overstated expenses? For example putting through personal items that he should not be? Do you look at his bank and can you confirm the income figures he has given you or are there other income items on the bank statement that are not accounted for?
Hi Mycroft, two things to add. Is is the kind of business where there could be a large adjustment for taking goods for own use - say a grocery shop?
Having dealt with that, how feasible is it that he can live off his current income sources? Look at the big picture of total household income and expenditure. How does the income compare with previous years. Side by Side P&L might give you some clues as to what has changed and suggestions for advice (and warnings).
And just to add, everything could be completely legitimate and above board.
I'm seeing a lot of losses this year.
also a lot of reduced directors salaries, no dividends, DLA's in serious credit.
People are reducing their outgoings to the bare minimum (I know of one client who is paying the mortgage but has switched off the central heating! (yes, in this weather)) but still the balance of income to outgoings is out of kilter.
I'm actually thinking this year that things have moved out of the frying pan into the fire.... Or is that just peculiar to my area?
If not then my impression is that next year will see a lot of the small businesses that started on the back of redundancies going to the wall.
And before anyone says "well obviously these businesses were not viable in the first place", they were / are, they are just faced by clients who virtually need to be sued before they make payment because their clients are doing the same to them and so on right up the line.
It seemes to be a cashflow nightmare out there at the moment.
In light of that Clare, if everything seems to be in place and your due dilligence of the clients books and records shows nothing untoward then it could just be that the figures really are a true reflection of the business.
Right, time methinks to crank up credit control as a service that I offer.
kind regards,
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.
Thank you everyone for your replies.
The expenditure is very similar to last years P&L , also the client is a car mechanic and as such purchases parts specifically per job. ie no real increase in closing stock.
Because I am still awaiting sufficient answers to my queries they have now missed the 31st January deadline.
If you're lucky he might let you look at the finer details as he could just be making a genuine mistake that is making his t/o look worse than it should (or his expenses).
Assume you're making sure that he's accounting for his VAT correctly i.e. not posting gross amounts to P&L for purchases and net amounts for sales?
Given the recession, a lot of small garages will reduce their labour rates and, therefore, their margins to get the work. But a gross loss would still be a surprise.
It seems, however, that sales are understated.
One trick I have seen mechanics play involves work that they do for second hand car dealerships.
They will do the work for said car dealer. invoice them and then keep the invoice back until they receive settlement from the car dealer. The payment date will then be included on the invoice date. Any such invoices not paid at the year end will then be included in the following accounting period and, therefore, not matched against the expense.
