Ok guys I am a bit confused. Bit of background I have an assignment to do using SAGE 50 software. I have been given the Opening Balance which has no accrual for electricity.
I have an electricity invoice on January 31st that covers November and December from the previous year and also January. I then have a bill every three months (which are paid on the 6th of the following month), so the last bill is at the end of October and leaves me with November and December outstanding. How would I record this. Surely i should start with an accrual and be left with an accrual, but I had no accrual on the opening balance.
The electricity bills paid match what has been incurred for the year but November to October has been paid rather than January to December. Can anyone help with reference to SAGE would be a bonus. My thoughts are there should be an accrual on the opening balance and I should be left with an accrual.
Not sure if im posting in the right section apologies if I'm not adhering to the forum's rules.
I'd say you should be consistent, unless you're in a position to make decisions on changing the way the company does things. If four quarterly bills go into each years accounts, and no accruals have been made in the past, don't worry. Each year has roughly the right cost in it, except the very first year that was two months short, and that presumably was some time ago. What has been done with other bills that cover more than one month?
Wearing my management accountants hat however, it would really irritate me, and I'd be itching to change it!!!!!!
You have identified that the opening balance omits an electricity accrual in error (and, consequently, the previous year's P&L omits an equivalent electricity charge). If it is not made clear in the question that the opening balances are open to change, I would assume that the opening balances are "post audit".
If an error is discovered in a year subsequent to the year the error is made, accounting treatment depends on whether or not the error is material with respect to its effect on the financial statements. In practice, the vast majority of errors are not material and are, therefore, simply corrected in the year discovered. In line with this I think it likely that it would be acceptable for you to start the year with no accrual and end the year with the appropriate accrual.
Thanks for the help. Yeh i think it is just an itch to want to change it. I haven't been told specifically that I can change the opening so i don't think i should either.
If i was to start with no accrual and end with the appropriate accrual it would make a difference to the financial statements. If I ignore the missed accrual for the start and don't report the accrual at the end of the year then everything will be correct in the financial statements as there isn't a change in the missed accrued electricity.
Doesn't seem right to me from an accountants view point, but for the purpose of the assignment i think this is the best bet.
If I ignore the missed accrual for the start and don't report the accrual at the end of the year then everything will be correct in the financial statements as there isn't a change in the missed accrued electricity.
Everything will not be correct in the financial statements if you take that approach. The year end accrual will be wrong and the retained earnings will be wrong. The technically correct approach would be to correct the immaterial error in the year it is discovered. Why do you favour a perpetual immaterial error in the balance sheet position over a one off immaterial error correction in the P&L? It's not going to result in a qualification of the accounts either way, but one is consistent with the statement of principles and the other isn't.
