Hi Guys
It is easy to deal if the insurance is paid upfront, but we receive a SageCover invoices UPFRONT for the 12 month period but are paying them monthly by D/D. The Invoice date is 7th November. Year end is 31 March. The way I was posting it in Sage is as follows:
(Let's assume the Invoice amount is £432.00, i.e £36.00 p/m)
1. Post a Supplier's Invoice:
Dr Accruals <-- Cr Supplier £432.00
2. On a monthly basis:
Dr Insurance <-- Cr Accruals £36.00
3. At the Year End I have an obvious problem: My Accruals A/c has a DEBIT BALANCE, which doesn't look right, Or Does it?????
Guys, please HELP. I've got couple of a similar invoices (i.e.Car Insurance) and am stuck!. Some saying that it should be treated as a Prepayment, and it confused me completely.
Many thanks in advance.
Replies (16)
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Simple
Your first journal is wrong - the debit (and subsequent credits) should be to prepayments
My way
Why is it "insurance"?
Dr Expense (whatever it is)
Cr Trade creditors
Invoice
Dr Trade creditors
Cr Bank
Each DD
Dr Prepayment
Cr Expense
Future expenses (at end of month)
Dr Expense
Cr Prepayment
Reverse previous journal (at start of month)
Yes
You can do it the shorter way.
The revering entry method is more useful when the invoicing is irregular in some way.
Are you sure?
That the invoice isn't an annual invoice to cover regular payments (which will be listed)? If it is you can just file it without entering it anywhere and treat each payment as a bank payment. You just need to have it to back up the VAT claimed.
Prepayment
If you receive an enter a purchase invoice then you are recognising the expense up front and that makes it a prepayment.
If you don't post the invoice and the payments are made monthly in equal amounts then you can post a bank payment as Richard says. You would have to ensure that the payments equalled the invoice though - not just the planned payments but the actual payments.
?
When the statement received in December it may show more or less interest so would need to adjust taxable profit for the prior year. How to do that correctly?
Why would you want to do that? Provided your 31 March 2012 figure is a reasonable estimate of the accrued interest to that date you don't need to make any adjustments. You would want to make a prior year adjustment only if you had materially over- or under-estimated the interest charge. Only a guess, but I suspect that £150 is not a material amount :)
Accrual
Accrue for your estimate at the end of a month and reverse it at the start of the next month.
You then only enter the charge when you know the actual amount.
I would use the rule of 78 to calculate the accruals.
I really can't see what the issue is
Your 31 March balance on the loan is always going to be based on your best guess. If you follow Peter's advice, you're sure to be pretty close - does it really matter if you're a few quid out one way or the other?
Using your figures (let's assume that the bank changes its procedures and issues the next statement on 31 March 2013, so that you know the exact amount of interest paid in the 15 months to 31 March 2013) - let's say that is £900, of which £170 relates to the quarter to 31 March 2012, but you've only accrued £150 for that period:
Year ended 31 March 2013:
Interest (15 months) £900
Less accrued to 31 Mar 12 £150
P&L charge to 31 Mar 13 £750
So, you've undercharged interest by £20 in 2012 and corrected it by overstating interest by £20 for 2013. Honestly, who gives a hoot? There is no need to make any prior year adjustment, there is no need to make separate disclosure. It's no different from any other accrual or prepayment based on best estimates - they will always sort themselves out in the end. Take heat & light, for instance. Let's say your bill to 28 Feb is £360. So you accrue £120 for the month of March. But, when the bill to 31 May comes in it says £420 (by which time you've been a good boy and completed and filed the accounts). Are you seriously suggesting that you're going to either amend the accounts or include a note in the 2013 accounts to say that £20 of the heat & light charge relates to the prior year?
If the differences are not material, close the books and move on.