I was wondering what is the minimum amount most people use for prepayments. I accept for large payments it goes without saying, but what if you had a magazine subscription for £36 per annum for 12 issues. Would you bother with prepayments or write-down the whole amount in month invoice received?
As a landlord my accounts are generally simple, it almost looks like cash accounting, but I must use the accruals bases. I just need to know where to draw the line, if at all ?
In my opinion it depends on the size of the business but generally speaking I wouldn't bother prepaying anything where the total cost is less than £100.
I agree the materiality is what is important but where you draw the materiality figure is debateable. I've heard people in the past say anything less than 5% is immaterial but that always seemed a bit high for me. In Mark's clients case he would be looking at £150k! I suppose it comes down to the point of whether it changes the bigger picture. So a £3m turnover company I wouldn't worry overly with £500 or so. As for £36 it's just too small too worry about. Of course small businesses (under VAT threshold but excluding landlords I think Michael) can use the simplified cash basis and the problem disappears!
Hi. I am still fairly new to being a self-employed bookkeeper. I recently posted a £2k annual insurance payment. I wanted to put it to prepayments and the director (client) asked me to leave it all as an expense in this month. Is this acceptable or should I just explain the accruals concept and tell him that we must? It's a fairly new company and the turnover is not yet established.
I'd leave as it is. It really only becomes important at period ends, so if there are no management accounts it isn't a problem as the numbers aren't being interrogated and at the year end the accountant will make an adjustment in the accounts. However you made the right call in trying to do things properly, just in practice it is often the case that we don't need to follow the 'theoretical rules'. Here is a client however who may appreciate some management accounts further down the line, so a future opportunity for you to get more work. Most self employed people in all businesses, not just bookkeepers and accountants, do not 'sell' enough to their existing clients so it is absolutely imperative that your clients know what else you can offer them (before he gets someone else in to do management accounts and tells you he didn't realise you did them too!)
Thanks very much Rob. That was a great answer and very encouraging. I think I'm being a bit pedantic sometimes but I find it quite difficult to know which circumstances merit bringing the full forces of all my training to bear and which don't. As you say though, I will continue to highlight such matters and make sure he knows what I can do.
