I have a client who operates under the cash accounting rules because of the nature of her cashflows - she's registered for VAT and issues an invoice for recruitment services in accordance with her contract payment terms, but will often not receive payment until her customer decides that he's ready to pay for the services delivered. As the amounts are significant it makes sense for her to only account for the output VAT once she's received payment. However there are a couple of instances where she's had to issue credit notes and pay refunds after the end of her accounting year in which she's already received payment. Is it permissable under the cash accounting rules to accrue for the reduction in her revenues for the accounting year by the amounts of the credit notes so she's not paying corporation tax on income that she subsequently hasn't (in effect) received?
Replies (5)
Please login or register to join the discussion.
Debtors and Creditors
Accounting for vat on the cash basis does not preclude preparing the annual accounts on an accruals basis, in fact not preparing on an accruals basis would imho be incorrect.
I think it is now FRS18 that covers what used to be in SSAP2 re accruals and prudence concepts.
Accordingly under the concepts of both prudence and accruals you ought to provide for these refunds, that arise post year end, within the accounts year in which the invoices were first issued where this is possible.
Confusion?
Confusion in the question - you refer to the client as "she" suggesting she is an unincorporated sole trader then you refer to paying corporation tax on "her" profit - suggesting client is in fact a company.
If client is a company the option of preparing accounts on the cash basis is not available. Full stop. So your questions about how to account for sales refunds in cash basis accounts does not arise.
How to account for sales refunds in accounts prepared on the accruals basis is explained by DJKL above. I agree with what he says except that it's more complicated if the business is the supply of goods.
If client is unincorporated and you are preparing her accounts on the cash basis you obviously can't anticipate a refund - the clue is in the word "cash".
Refunds
Confusion in the question - you refer to the client as "she" suggesting she is an unincorporated sole trader then you refer to paying corporation tax on "her" profit - suggesting client is in fact a company.
If client is a company the option of preparing accounts on the cash basis is not available. Full stop. So your questions about how to account for sales refunds in cash basis accounts does not arise.
How to account for sales refunds in accounts prepared on the accruals basis is explained by DJKL above. I agree with what he says except that it's more complicated if the business is the supply of goods.
If client is unincorporated and you are preparing her accounts on the cash basis you obviously can't anticipate a refund - the clue is in the word "cash".
It appears to be a recruitment business.
The refunds (A guess) may arise as the placed individuals do not remain in place long enough, hence the fees charged needs to be reduced.
If this is the case then depending on the supply contract and whether the refunds are contractual, as I am guessing they may be, it may be that the income ought only be recognised in increments, for accounts purposes, as it is earned.
(I used to work on a recruitment agency audit and accounts job a long time ago)
Yes but question is about accounts on the cash basis so the old concepts of recognising income when it is earned go out of the window. That is the point.
Yes, but my comment re your post was more in connection with
Yes but question is about accounts on the cash basis so the old concepts of recognising income when it is earned go out of the window. That is the point.
Yes, but my comment re your post was more in connection with your statement regarding matters being more complex if connected with the sale of goods, as the original post had already said it was a recruitment business.