Hi all,
I have a query about overstated bank balance in the BS. I've taken over the accounts of a client and due to file the 2013 accounts. While finalising the accounts I came across this:
1. An overstatement in the Assets against bank balance by £2,600.
2. An incorrect accrual entry in Creditors which is totally wrong as there were no need to accrue for the expense (director's salary) and the said expense was already fully paid in the financial year.
Upon investigating the difference (I checked the bank statements for the full financial year for 2012) I found out that the previous accountant missed about a whole month's transactions (the last month of the financial year) which is the reason the bank balance is overstated by £2,600. Also upon investigation I found that the accrual entry was completely wrong as all the director's salary for the full financial year was paid in the financial year and did not straddle to the next financial year 2013.
In such a situation, I would like to know whether it would be okay to correct the accounts in 2013 accounts by accounting for the unaccounted expenses due to which the bank balance was overstated. Is it also okay to rectify the incorrect accrual entry by Dr Creditor Cr Salary in 2013 accounts? Or do I have to go back to 2012 and rectify the accounts for 2012 and re-submit it? What are the HMRC repercussions involved in doing so?
I would very much appreciate your thoughts.
Kind regards.
Replies (17)
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Hi
2012 accounts are clearly wrong and a tax return has been submitted with these figures that are wrong. I would if I was doing the job and re-state the 2012 accounts and resubmit the tax return and then move onto the 2013 accounts with the correct opening position.
Clearly if there are expenses not claimed and these are greater than the erroneous accrual for directors salary that does not exist then tax paid reported on the tax return submitted for 2012 will be reduced and so will payments on account.
Hope that helps
Kind regards
David
David is assuming that your client is an unincorporated business rather than a company. But as you refer to a director's salary, I can only assume that your client is a limited company.
That makes a difference to how you should proceed.
I would not be changing the 2012 accounts. The errors seem to cancel each other out to some extent. I would simply make any necessary corrections in the 2013 accounts. I would not even show them as a PYA unless they were really material.
As an aside - have you asked the previous accountant for a copy of the 2012 bank reconciliation?
Agree with John
There are errors but they don't seem to be material. Correct them and make sure you get the Balance Sheet right this year.
Seconded
I also agree with John. I would not redo the previous accountants work I would just correct the errors and go forward from there.
EDIT - crossed with above poster!
First thing is to ask the previous accountant for a copy of the bank reconciliation. Although you seem confident of your findings, without the reconciliation you are speculating. In the absence of the previous accountant's reconciliation you will have to prepare your own. If you are right, that will identify the payments on the bank statement that have been omitted from the records (together with, presumably the usual timing differences such as un-presented cheques etc.).
Then you put the necessary adjusting entry through the 2013 accounts. Your suggested alternative of asking the client to put his own money back into the account to replace the payments that have not been posted is not sensible, and will simply lead to your engagement being terminated. Would you follow such a suggestion if you were the client and it was your money?
2013 bank reconciliation
What does your 2013 bank reconciliation look like? If you are right about what was wrong with the opening one, it should be out of balance by the same amount.
Thank you. But what I meant
Thank you. But what I meant was - is the amount by which the 2013 reconciliation is out of balance the same as the amount by which you are assuming the 2012 reconciliation was out of balance? If so that tends to confirm that your assumption is correct. If not, you still have some more work to do.
Small difference?
Roughly is not good enough with bank reconciliations. If your 2013 difference to the closing statement balance is not the same as the 2012 difference to the opening statement balance, you could have some big undetected differences. If you are missing £10,000 of bankings and £10,062 of payments, you will have the same (small) difference but will be missing some pretty big amounts.
In this case, I would prove one side, usually the bankings are there tend to be less transactions. If you can prove that one side is correct, then you genuinely do only have a small difference.
No difference
To be fair, even if it balances, you could be missing £10,000,000 of bankings and £10,000,000 of payments.
In theory.
Skewed figures
I would hope that missing sums of that size would become obvious when you compared to the prior year results. :-) To be fair, even if it balances, you could be missing £10,000,000 of bankings and £10,000,000 of payments.
It is true that you could be missing huge sums on both sides that just happen to perfectly match. The odds of that happening are so great that it is not unreasonable to assume that a balanced bank means everything is correct in the absence of other evidence (a £10,000,000 turnover company having income of 50p this year for example). With an unbalanced bank you know something is wrong. Until you have checked, you don't know if the error is as small as it appears to be though. Once you have verified that the error truly is as small as it appears, it is a matter of materiality and judgement as to whether you spend time looking for it.