Can anyone give me some advice on what is probably quite a common problem? I have just taken over accounting for a micro company and, after checking through the trial balance figures from the previous accountant, have found a few balance sheet errors: -
(1) Corporation tax from a previous year of about £59 was not actually a liability as it had been paid.
(2) A trade creditors figure of £401 was actually zero as the only trade creditor had been accounted for elsewhere.
(3) The figure for NI owing was understated by about £40.
The net effect of correcting these will increase the retained profit & loss figure by about £420. In the previous year's balance sheet this figure for retained profit & loss was a negative of about £445.
The company's accounting year runs from 1 June to 31 May. If I date the adjustments 1 June at the beginning of the current year, the balance sheet figures for the previous year will remain unchanged but the adjustments will correctly go into the balance sheet figures for this year's accounts. If I date the adjustments 31 May of the previous year, it will of course correct the previous year's balance sheet figures, but I am concerned it may be difficult to get Companies House to accept this filing if the comparatives are different from the figures that were filed for the previous year. I believe that, under FRS105, working prior year adjustments into a current year's accounts is not really encouraged, but the concept of materiality comes in. This is a very small company which is starting to turn itself around - I hope - and I don't know that a correction of £420 is really considered material.
Thanks very much Doug, that seems to be the general consensus. Some further investigation brought the following to light: -
(1) It turned out that the Corporation Tax payment was actually recorded by the previous accountant but treated as a purchases payment. So the journal DR Corp Tax Liability £59, CR Purchases £59 sorted that one out.
(2) As for the amount under Trade Creditors, that was actually an accrual for purchases from quite some time ago which really should not have been in that account. That required the journal DR Trade Creditors £401, CR Purchases £401.
(3) That only left the NI correction. After long consultation with HMRC, it turned out the NI owing at the beginning of the year in question was understated by £48. As it's reasonable to assume that would have included employee's NI at 12% and employer's at 13.8%, I charged that in the ration 12:13.8 between the director's loan a/c and wages & salaries. I corrected for that with the journal DR Director's Loan A/C £22 and DR Wages & Salaries/Employer's NI £26, CR PAYE & NI Liability £48.
Now the current year incorporates the adjustments correctly and the balance sheet figures are unchanged for last year and show the correct state of things at the end of this year. The previous accountant agrees to these changes, but I think it goes to show the importance of getting all the background info when taking over accounts from someone else.
Is that correct though? Eg the NI - was that a reasonable assumption? Perhaps not, which wouldnt make the accounts correct, just as much as shoving the difference into another cost code. Surely the only way is drilling down to locate the actual error. Im kind of not surprised the previous Accountant agreed to the changes, but that begs a few more questions which would be about as interesting
To put things into perspective, the adjustment to the NI owing was only £48. Even HMRC were very confused about the how the amount owing was arrived at and the previous accountant didn't know anything about it, as his client was supposed to be looking after his own payroll. As far as we can reasonably tell, there were mistakes and omissions in the payroll submissions made in the past, but I think it's fair to assume this extra £48 may roughly be apportioned between employee's and employer's in that ratio.
Lawyers have an expression 'de minimis non curat lex' - the law does not concern itself with trifles - and I don't think a struggling small business nor even the HMRC want to split hairs to such an extent it prevents us tidying their past accounts and getting on with business in the future.
To put things into perspective, the adjustment to the NI owing was only £48. Even HMRC were very confused about the how the amount owing was arrived at and the previous accountant didn't know anything about it, as his client was supposed to be looking after his own payroll. As far as we can reasonably tell, there were mistakes and omissions in the payroll submissions made in the past, but I think it's fair to assume this extra £48 may roughly be apportioned between employee's and employer's in that ratio.
Lawyers have an expression 'de minimis non curat lex' - the law does not concern itself with trifles - and I don't think a struggling small business nor even the HMRC want to split hairs to such an extent it prevents us tidying their past accounts and getting on with business in the future.
Best wishes Mark
"Trifles"
Yes. Yet you have clearly have spent more time than was reasonably chargeable to get to the bottom of one thing that you then actually get to the bottom of. So one wonders why. Besides we all know HMRC records on PAYE amounts owing are often incorrect. I was just using the ni as one eg.to show the accounts are not necessarily 'correct' because you could quite easily have made other assumptions
Well, the first two points have definitely been dealt with correctly. My predecessor had made a couple of mistakes which we sorted out to his satisfaction - and mine. Only the NI could be said to have involved some 'assumption' and I really think it was justified.
As for the client, I'm only charging a simple flat charge - which he's more than happy with. I only, at this stage, look after a little handful of clients.
