Question about Supplier Payments on Account

A supplier has been overpaid. Our client paid the invoice by Direct Debit transfer but a week or so later inadvertently paid again by cheque having received a second copy of the invoice.

This second payment was made as a payment on account as there was no matching invoice. (no problem and easy to resolve later). The supplier/creditor therefore has a debit balance on his account. There are also a bunch of suppliers which have debit balances since they get paid in advance, in instalments, with one invoice several months down the line. Or one supplier of web services who doesn't invoice yet receives agreed payment by standing order. Since there is no invoice, there is no charge to P&L despite making payments to that supplier.

Anyway, a colleague believes that Payments on Account affect the P&L and I don't think that is true. She is concerned that these debit balances on the creditor's account affects the profit & loss, and will result in higher income tax being due at year end because the client is owed money by the supplier, and the expenditure has not been recorded to offset that.

I feel sure my colleague is confusing Bank Payments (which will relate to a P&L account) with supplier payments which merely credit the bank and debit the supplier.

I may not have explained it very well, but I am confused. Note that I am a bookkeeper and not a qualified accountant, but I like to be aware of these things and correct my understanding if possible.

FWIW, I use Sage Line 50 version 12 - but my question is probably more general than that.

Any comments will be gratefully received.

Thanks

Comments

Supplier Payments on Account

johndon68 | | Permalink

Supplier Payments on Account have no impact on the P&L at all as they only affect the Bank account and the Creditors Control account...

John

Payments on Account

Jjones12345 | | Permalink

Payments on account (or debit balances) should always be investigated and if an invoice has not been received - and  if appropriate you should create an accrual until the invoice is received in the correct period for which the payment on account refers. If the payment is a duplication then it can be refunded.

 

 

Payments on Account

Jjones12345 | | Permalink

In the case of your payments for which there are no invoices - you may wish to post these through the cash book instead of the purchase ledger - if your supplier is paid via standning order or DD for a monthly cost for which VAT exists you should and he must provide you with a schedule showing the VAT which you can post as a monthly dummy invoice to the purchase ledge,  keeping the schdule or agreement as proof for the VAT and Revenue

petersaxton's picture

VAT

petersaxton | | Permalink

"In the case of your payments for which there are no invoices - you may wish to post these through the cash book instead of the purchase ledger - if your supplier is paid via standning order or DD for a monthly cost for which VAT exists you should and he must provide you with a schedule showing the VAT which you can post as a monthly dummy invoice to the purchase ledge,  keeping the schdule or agreement as proof for the VAT and Revenue"

If the treatment of VAT agrees with the payments then you only have to include VAT in the Bank Payment and keep it off the Suppliers Ledger.

VAT on POA in supplier a/c

JC | | Permalink

In this respect you have raised a side issue on VAT

Presumably when you entered the 'On Account' payment into the supplier a/c you were asked to apply a VAT rate (or this used to be the case in earlier versions of Sage)

The question is therefore, how can a VAT rate be entered when one is not applying the POA to an actual invoice and therefore no VAT has been determined

Surely the correct approach would be to enter the POA as a straight amount with no indication of VAT. However, if one does this it subsequently becomes difficult within Sage to allocate the POA to any future invoice with a different VAT code

Is this the correct handling of the situation by Sage

VAT on POA

janesorganic | | Permalink

I can only assume that although the POA does not affect the P&L it may have an effect on the VAT return. In order to avoid this I have just posted a payment on account as a sundry creditor at zero rate (and it should probably have been outside the scope rather than zero) rather than apply to the purchase ledger.

Not perfect, it would be much better as a POA without the VAT complications. I would very much like to hear Sage's view on why the VAT message comes up.

@JC

johndon68 | | Permalink

When entering a Payment on Account, Sage will only ask for a VAT Code if you are on the VAT Cash Accounting Scheme - on the Standard VAT scheme, the POA defaults to T9 and you don't get the option to change this.

John

Questions about supplier payments on account

Carolynne | | Permalink

Hello

I get this a lot with clients.  

I always post an accrual through for the Net amount that is due.  This is then reflected in the P & L to the correct amount.  When the invoice comes in, if I am doing management accounting and do not wish to enter the invoice in at a previous months date.  I enter the invoice to the current month I am working and and enter a reverse to the accrual in the same date as the date you have entered to invoice, to remove this in the current month so as not to duplicate it in the P & L and to clear the balance in accruals.

But if as suggested these payments relate to a VAT schedule, then you are better entering the payments via the cash book.

Hope this is of help.

-- Carolynne

Effect on Profit and Loss and Vat

sarah douglas | | Permalink

Hi 

Your client is right to a certain extent, as the payments on account do not effect the Profit and Loss.  

If you have invoices from the Web for online ordering  then you must enter those  invoices.

With regards to Invoices been paid in advance then my advice would not be to put them through cash payments and you will now not have a record in your creditors that you have paid this money in advance,  when you get the invoices all you need to do is go to the Bank enter the date of the original payment and allocate the Invoice i to the payment on account, effectively you will have a Zero Balance.  This has the effect of you always been able to see in the bottom details what Invoices the Payment on account has paid  when you use show details.  May I also suggest you enter the actual date of the invoice when entering a invoice .

Vat 

With regards to the Vat Element Sage only asks you about the Vat element in Creditors and Debtors  if you are doing  Vat Cash  Accounting and the reason for this is because the Detailed Vat Report records the payment rather then the Invoice for the Vat Return and also includes the Bank Payments and Bank Receipts 

If you are using the Standard Vat Scheme Sage will not ask you for the Vat Element of the payment on account in either the Creditors or Debtors as it is the invoice it pulls its information from as well as Bank Payments and Bank Receipts .

Therefore your clients Profit and Loss will only be effected when they have the invoice , at the year end a journal might be required for prepayments

-- Kind Regards Sarah@ Douglas Accountancy & Bookkeeping Services, Glasgow

Is Sage handing of VAT correct

JC | | Permalink

@johndon68 /@sarah douglas - thanks for the explanation about the requirement to enter VAT only on cash accounting

Is this the correct handling of VAT under these circumstances - looks as though Sage is insisting on generating a VAT code where none can possibly exist

After all a POA is just that - a current payment in lieu of undertemined goods and it is not possible to know any future VAT element

Surely the VAT element can only arise at the point when some/all of the POA is allocated to an invoice - to attempt any other approach is incorrect and potentially 'fraudulent'.

i.e. extreme - if £100k/£1m was made as a POA from a supplier and allocated to a standard rate VAT code then according to Sage one could reclaim the VAT in the normal was.  Now if the original/matching invoice was delayed indefinately or never arose - then what - pressumably there is no defined deadline for a matching invoice to arrive? In theory HMRC is out of pocket - or is this example based on incorrect assumptions?

Have spoken to HMRC and they seem to think it is incorrect handling of VAT

So the real point is - have Sage got the VAT element processing correct under these circumstances ?
 

Vat

sarah douglas | | Permalink

Hi

in reply to your above question.  If you are doing standard vat accounting then it is always the vat form the invoices purchases ,Sales,  Bank payments and receipts that will always be used.  It does not matter whether you match it to an invoice or not that is good bookkeeping.

Sage is not wrong in the way they do as if you have a look at your payment on account it is allocated a T9 code which is not a vat code and will not appear on the vat return .(Standard Vat)

Yes you are asked to make a judgement re the vat so for example if you do not want it to have any vat then you would pick T9 when asked.  If you then go to match a invoice with payment and you have two different codes it wont allow you to clear it in the bank untill you match the vat , effectively they are proofing it for you either way so you do not lose money.

It does sound like if you have a lot of these there is a issue as to why is she paying without an invoice even if it is in advance and I suspect that is what the HMRC means by incorrect.

If you are doing cash accounting it is also correct for the vat , but your client is right that there needs to be invoices against these payments on account as it is the invoice, payment and receipts that are taken into account when doing the P&L

Hope this helps

- Kind Regards Sarah@ Douglas Accountancy & Bookkeeping Services, Glasgow

Payments on Account

maxmillion | | Permalink

Thanks to everybody for the great answers. You have certainly helped me to get it clearer in my head.

While I understand that there is no VAT implication on the Payments themselves, I had not considered doing an accrual in this particular instance to at least get the expenses right.

And yes, regarding the overpayments or duplicate payments to the supplier; I will contact them to ask for a refund assuming there are no further invoices going through to offset against.

Thanks again. I appreciate it.

Michael

petersaxton's picture

Accrual?

petersaxton | | Permalink

"While I understand that there is no VAT implication on the Payments themselves, I had not considered doing an accrual in this particular instance to at least get the expenses right."

You shouldn't do an accrual and the expenses are not wrong.

completebookkeeping's picture

VAT

completebookkeeping | | Permalink

-- Complete Book-Keeping Ltd

Sorry just seen this and may be a bit late in the day but I was concerned regarding late payment of VAT to HMRC.

re: Cash Accounting -

This is just as stated and the VAT is reflected when the cash is transferred from 1 company/person to another.

Sage is therefore correct to ask for a VAT code at this point whether an invoice is received or not.

Re: Standard VAT

The Tax point is the earlier of Supply of goods or payment issued (subject to exceptions).  Therefore Sage is correct to enter the payment on account as T9 as cash does not reflect the VAT.

As the VAT date is the earlier of supply of goods or payment then it is good practice to investigate a payment or receipt on account to ensure VAT has been handed to HMRC on time.

A VAT schedule is usually produced by supplier in advance as they will have the installment dates already.

 

further information can be seen on HMRC website:

www.hmrc.gov.uk/vat/managing/returns-accounts/tax-points.htm

 

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