I have a question and would just like to hear peoples thoughts and opinion.
I have been at a company for 3 month and the annual insurance (Professional Indemnity in this example) has just been renewed and subsequently set up via Premium Credit, i.e. Direct Debit.
What the previous chap used to do was post the annual premium to purchase ledger in Sage from the premium summary letter, then set up an automatic prepayment each month.
My question is, is this correct way of doing things? Its great for keeping an eye on respective balances but this is easily achieved from simply looking at the P&L nominal.
More importantly, would this not inflate the creditors balance?
My thoughts would be to simply post the DD payment to the nominal as a bank payment each month without it touching the purchase ledger?
Its an interesting question and one I would agree with you on. We're in silly season at the moment with tax returns so other peeps thoughts may not flood through until after tomorrow.
However, the predecessor should have posted to accruals[correction that should read creditors], rather than purchase ledger, if he was doing it that way.
Welcome to the forum, we're a nosy bunch so give us some idea of your accounts background, qualifications etc so we know what level to pitch answers.
-- Edited by Leger on Monday 30th of January 2017 01:32:12 PM
-- Edited by Leger on Monday 30th of January 2017 03:27:39 PM
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John
Any advice given is for general guidance and professional advice should be sought applicable to your circumstances.
I am part qualified ACCA. My learning has been from studying, reading lots of books, and some good experience working in accounts for the last 5 years. No mentor though.
I have worked at some large companies so as you can imagine long scalar chain, many employees, and thus a smaller fish in a bigger pond so exposure to certain elements of accounts function was restricted.
I am now in a smaller company and exposed to everything.
Would you agree the way to treat this is to simply post the bank payment to nominal each month via the bank rec?
I am wondering if this even needs to touch the balance sheet?
-- Edited by maverickj8 on Monday 30th of January 2017 02:13:56 PM
If I understand correctly - surely if you recognise only from bank when doing a rec you're effectively recognising when paid, not when incurred? Personally I'd Dr Bs Cr Expense with prepayment, then auto transfer each month.
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Johnny - Owner of an overly-active keyboard.
A man who can read, yet doesn't, is in no way wiser than a man who can't.
If I understand correctly - surely if you recognise only from bank when doing a rec you're effectively recognising when paid, not when incurred? Personally I'd Dr Bs Cr Expense with prepayment, then auto transfer each month.
Which is why I said it's an interesting question. When is the expense incurred, on receipt of the Premium Credit breakdown, or when the DD is due? Personally I would opt for DD, but bearing in mind I only deal with small companies, and the nett result is the same.
Strictly speaking, you should show PC as a creditor (loan agreement) and do a journal to the expense account once a month, separating the interest. Crediting the expense at the beginning will throw the PL sheet out if monthly accounts are prepared.
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John
Any advice given is for general guidance and professional advice should be sought applicable to your circumstances.
Thanks. DD route makes logical sense to me. If we are recording as a prepayment then we are essentially overstating our assets too are we not? That's fine if we pay for the premium up front but we haven't.
Secondly my rationale for recognition is that if we stopped paying for the premium our insurance would be cancelled and not owed
By the way, Just thinking out loud. Trying to probe further opinion. Thanks
