Annual CCTV service - is it a prepayment?

Annual CCTV service - recognise in full or spread it?

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Hi,

I have asked multiple people this quesiton and nobody seems to give a definitive answer so thought I would enquire on here too... If you receive an invoice (dated 1st July and company y/e is 31st December) for an annual service, would you recognise that full cost in the current financial year or recognise part of it as a prepayment? Technically, the service is carried out in June so I would recognise the full cost in that year, but I am being told by others that 50% should be recognised in the following year.

Replies (37)

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By paulhammett
22nd May 2024 09:20

If the service was actually carried out in June, I would recognise the full cost in that year.

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paddle steamer
By DJKL
22nd May 2024 09:30

Does service bill also include a maint contract for the year?

We have had a few such (usually entry systems/alarms) where what we pay covers more than just the initial service but also covers basic callouts for the year.

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Replying to DJKL:
RLI
By lionofludesch
22nd May 2024 10:25

DJKL wrote:

Does service bill also include a maint contract for the year?

Great question.

I'd normally write the cost off on the day the work's done but if there's some ongoing commitment included, maybe not.

Materiality's an issue too.

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By Mr_awol
22nd May 2024 10:43

As DJKL infers, there may be a future benefit if there's an element of service contract/maintenance in place. Or, at a push, if the service was very expensive and was necessary to maintain some sort of warranty, etc.

Other than that, for me it's no different to a car service (or car wash for that matter) in that the work has been performed in year, the cost is in year, and at some point it'll need doing again (but probably in another year, which gives you an idea of how often i wash my car!)

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Routemaster image
By tom123
22nd May 2024 10:48

As a middle ground I often prepay these type of things for the remainder of the financial year I am working in.

They tend to be (for me) all premises related, so this kind of fits.

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Replying to tom123:
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By Mr_awol
22nd May 2024 16:57

I can see the logic to an extent, but if we want to go far-too-deep into it, maybe we should consider:
1) it is probable that any future economic benefit associated with the item will flow to or from the entity?
2) If the answer is yes, then would you say that one should accrue for the next service (being the cost to bring the asset back into condition) or prepay the last one (being amortisation of the cost incurred over the period until further expenditure is necessary)?
3) Having considered the second point, does that change the answer to the first one?

One of those topics that could give rise to an interesting discussion, or completely bore the pants off people (or turn into a vicious argument) depending on how 'fun' people think accountancy is.

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Replying to Mr_awol:
paddle steamer
By DJKL
22nd May 2024 17:32

Fun, Fun- if you wanted Fun you should have been an actuary!!!!!!

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Replying to DJKL:
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By FactChecker
22nd May 2024 17:44

... 'til her Daddy takes the T-bird away!

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Replying to FactChecker:
Pile of Stones
By Beach Accountancy
23rd May 2024 08:27

... 'til her Daddy takes the T-accounts away! (surely)

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Replying to Mr_awol:
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By FactChecker
22nd May 2024 17:42

If you want an 'interesting' discussion ... I notice that everyone appears to have made the same (quite reasonable) assumption - that the July invoice is for work already completed in June (aside of the point about a possible element of future support or maintenance services).

But I have met a few clued-up service providers who, in this case, invoice in July for the *next* service due in June of next year (and typically state that failure to pay promptly will invalidate the ongoing warranty)!

BTW I don't mind boring the pants off people (there's enough evidence out there already), but I'd rather not get into any vicious arguments (to add to all those typically involving a freeloader) ... so anyone is free to ignore this post.

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By Paul Crowley
22nd May 2024 11:44

Accountancy is full of things that there is no definitive answer for.
It is just a timing issue.
I would not bother to prepay, done once and you need to repeat the exercise each year.

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By I Can Help Your Business
23rd May 2024 08:52

What am I missing?
Service carried out in June
Invoice sent in July
Year end in December

What is the accounting anomoly that means you carry the cost over to the following year?

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By AndyTaylor
23rd May 2024 13:37

What you are missing is that the benefit of that service can logically be assumed to accrue to the business over the next 12 months. Applying the matching concept means that 50% of that cost should apply in this years accounts and 50% in next.
There are other things that might alter how you apply the matching concept but most, if not all, of them can be grouped into mulling over materiality (aka can I be bothered?)

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Replying to AndyTaylor:
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By I Can Help Your Business
23rd May 2024 13:57

But what is the benefit of doing this?

Putting the whole invoice through now increases costs and gives the immediate benefit of reduced CT in this year?

It is also cleaner, simpler accounting.

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Replying to I Can Help Your Business:
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By FactChecker
23rd May 2024 23:45

Maybe some people's criteria extend beyond merely minimising short-term tax?

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Replying to FactChecker:
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By tom123
24th May 2024 08:15

Welcome to my world of monthly reporting and variance explanation :)

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Replying to I Can Help Your Business:
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By adam.arca
25th May 2024 11:57

I Can Help Your Business wrote:

But what is the benefit of doing this?

Putting the whole invoice through now increases costs and gives the immediate benefit of reduced CT in this year?

It is also cleaner, simpler accounting.

But the benefit of doing something (particularly the tax benefit) isn’t a fundamental accounting concept, whereas matching is.

Extreme example: client has £10k invoice on last day of year (for stock, say). Do you adjust so that hits the balance sheet or do you ignore because that is cleaner, simpler accounting?

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Replying to adam.arca:
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By Paul Crowley
25th May 2024 12:53

True and fair view is neutral is both the stock and the liability is ignored. One is plus, the other minus.

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Replying to Paul Crowley:
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By adam.arca
27th May 2024 08:58

Paul Crowley wrote:

True and fair view is neutral is both the stock and the liability is ignored. One is plus, the other minus.

Not the strictly correct position but you are pragmatically right there 7 times out of 10. But what about the instances where the impact on the B/S also has T+F implications?

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Replying to adam.arca:
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By Paul Crowley
27th May 2024 20:21

Not likely on a micro company unless it already failed one of the limits, with the prior year having failed two.
For company risk view then net current assets are the same.

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Replying to I Can Help Your Business:
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By AndyTaylor
25th May 2024 13:26

If we move away from the matching concept in order to minimise tax liabilities then we also move away from the true & fair principle. Which is why accounting standards were introduced in the first place. The tail should not be allowed to wag the dog.

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Replying to AndyTaylor:
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By Paul Crowley
27th May 2024 20:24

Self-employment and rent are both defaulted to cash basis by HMRC for personal tax returns.
Accounting standards are not important to HMRC.

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By bettybobbymeggie
24th May 2024 09:41

I took on a new client recently and found the work van's car tax had been prepaid - an adj of c.£125 to Motor Expenses total for the year of £15k - it always makes me giggle when accountants waste time on this. Meanwhile, there was a near £20k discrepancy on the VAT control account. I do wonder whether some folk spend too much time mucking around with prepayments and too little time on the big stuff.

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Replying to bettybobbymeggie:
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By Yossarian
25th May 2024 09:29

Back when farmers used to pay an annual £15 VED on tractors, I had a colleague who insisted on prepaying them in the accounts. Some larger farms owned several tractors, and on their file would be a page of workings, splitting the £15 payments between two years. I often had an almost overwhelming urge to throw the file through a large window.

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Replying to Yossarian:
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By FactChecker
25th May 2024 11:11

If you'd not noticed that the window was closed when you heaved the files at it, would you have treated the repairs as capital or revenue expenditure? :=)

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Replying to FactChecker:
RLI
By lionofludesch
25th May 2024 11:39

FactChecker wrote:

If you'd not noticed that the window was closed when you heaved the files at it, would you have treated the repairs as capital or revenue expenditure? :=)

Capital or revenue - it's still a debit.

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Replying to lionofludesch:
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By adam.arca
25th May 2024 12:08

But isn’t the key question whether the window was on the right or left ?

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Replying to bettybobbymeggie:
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By adam.arca
25th May 2024 12:02

bettybobbymeggie wrote:

I took on a new client recently and found the work van's car tax had been prepaid - an adj of c.£125 to Motor Expenses total for the year of £15k - it always makes me giggle when accountants waste time on this. Meanwhile, there was a near £20k discrepancy on the VAT control account. I do wonder whether some folk spend too much time mucking around with prepayments and too little time on the big stuff.

Yeah, that’s silly. On the other hand, if motor exes were say £1k, then I would be tempted to adjust and, if they were say £500, then I would definitely adjust. So it’s really all a question of context.

What I’ve personally always found weird are the prepayments / accruals calculated for ridiculously precise amounts like (say) £387. Why not round to £400? Or, in the old days (showing my age now), folk who prepaid the telephone rental whilst at the same time accruing the telephone charges.

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Replying to adam.arca:
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By FactChecker
25th May 2024 12:36

"What I’ve personally always found weird are the prepayments / accruals calculated for ridiculously precise amounts like (say) £387. Why not round to £400?"

I've always assumed that it was merely a matter of whether figures are individually calculated (so £400 is fine and 'easier' to understand for management)
OR are 'automatically' calculated, say via a good old fashioned spreadsheet (in which case why waste time then manually rounding them)?

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Replying to FactChecker:
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By Paul Crowley
25th May 2024 13:04

Spreadsheets tend to do as they are told. They can be told to round.
Humans less so.
Spurious precision is misleading, and counting days really is a pointless activity.
HMRC pushes cash basis for rent income and self-employment, so they have zero interest in accounting principles

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Replying to adam.arca:
RLI
By lionofludesch
25th May 2024 13:26

adam.arca wrote:

What I’ve personally always found weird are the prepayments / accruals calculated for ridiculously precise amounts like (say) £387. Why not round to £400?

Interesting. If I'd calculated a prepayment to be £387, why would I bother to round it? It's no more difficult to use £387 rather than £400.

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Replying to adam.arca:
RLI
By lionofludesch
25th May 2024 13:26

adam.arca wrote:

What I’ve personally always found weird are the prepayments / accruals calculated for ridiculously precise amounts like (say) £387. Why not round to £400?

Interesting. If I'd calculated a prepayment to be £387, why would I bother to round it? It's no more difficult to use £387 rather than £400.

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Replying to lionofludesch:
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By adam.arca
27th May 2024 09:05

Prepayments and accruals are by their nature an approximation and are in any case an accounting conceit rather than a true asset or liability. Plus I’ve always been keen on the idea of being approximately right rather than precisely wrong. So, I would much prefer my balance sheet to include an approximate asset of let’s say £400 give or take rather than a precisely calculated but effectively meaningless £387. Just my take on the matter, I suppose.

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Replying to adam.arca:
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By Paul Crowley
27th May 2024 20:30

I have the same view.
Staff just cannot help themselves, using months (an approximation) but then giving a result in pennies.

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Replying to Paul Crowley:
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By adam.arca
28th May 2024 12:39

So true. It's like the more precise a number, the greater weight it somehow carries. Yet ignoring all the approximations and estimates which may have gone into calculating that number.

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Replying to bettybobbymeggie:
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By Paul Crowley
25th May 2024 12:55

+1
Worry about the big stuff, the trivial is time wasting.
Prepayments and accruals sort themselves out next year
VAT not working suggests real genuine errors

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By paulwakefield1
28th May 2024 08:02

Unless, as DJKL pointed out, there is an element of an annual maintenance contract in advance, of course the service should be expensed. The service is dealing with previous wear and tear and bringing the asset back to its original condition as far as possible. i.s servicing is in arrears not in advance.

There are exceptions where it is a requirement to have major inspections, etc. but then you are getting into the realms of capitalisation.

There is a good chance it is all immaterial anyway.

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