I have inherited a set of accounts with a prepayment value in the trial balance which has not been reverse since before 2004 and I cannot trace it back further. How do I treat it?
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I would credit prepayment and debit the p/l as a sundry expense and for prudence sake (as you don't know what it relates to) add it back in the tax comp as a disallowable expense.
It depends what it relates to.
You will get a good idea from the timing of payments made this year.
If the client paid e.g. annual insurance just before the year end and that happened every year it would be correct to have a prepayment showing at each year end.
Just because the previous preparer was perhaps lazy and not altered it in line with the expense doesn't mean it is not genuine.
When you have completed the current years accounts you'll have a better idea about whether prepayments are required.
If it is large and not obviously required write it off, and to be on the safe side, as charlb says, you could disallow it for tax.