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Financial Statements Differ To Management Accounts

Financial Statements Differ To Management Accounts

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I am presenting a scenario that I have come across in real life and was hoping you can shed some light on how we should treat this

The auditor has picked up the incorrect treatment of a refund which was received from the bank due to overpayment of charges in the past. The local accountant posted the following journal 

Debit Bank £10,000
Credit Prepayments (should have been P&L) £10,000

In preparing the financial statements the auditor has picked up this mistake and performed the “fix” and so posted the following correcting journals when calculating the taxable profit

Debit Prepayments £10,000
Credit P&L Bank charges £10,000

Now the problem is the retained earning c/fwd into this year on the books differ to the retained earnings c/fwd as per the financial statements as the auditor has included the credit to bank charges when preparing the FS

My question is how do we get the retained earnings showing on our system in sync with the retained earnings on the financial statements?

Do we post the following journal in this years books?

Debit P&L £10,000
Credit Retained Earnings £10,000

Please help so confused!!!

Replies (8)

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By Sandnickel
02nd Oct 2019 06:55

Dr prepayments and credit the retained earnings. The balance in your prepayments should also be incorrect by the same amount.

I'd probably ask the auditor first to check if there were any other adjustments (tax?). They should be able to provide an opening balance adjustments schedule.

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Replying to Sandnickel:
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By Newbie19
02nd Oct 2019 22:51

This is the opening balance adjustment that the auditor also stated

What throws me off is exactly what you have stated "the balance in your prepayments should also be incorrect by the same amount"

As the prepayments balance sheet figure is now effectively incorrect by this amount, should we not clear the difference through the P&L?

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Replying to Newbie19:
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By Sandnickel
03rd Oct 2019 06:49

You dont need to amend anything in your prior year or your current p&l. All you need to do is make your balance sheet items match the auditors.
If you dr prepayments & cr retained earnings do the balances match? If so, job done you have nothing else to worry about.

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Caroline
By accountantccole
02nd Oct 2019 07:46

What software are you using? Have you closed the previous year and rolled forward (which SAGE 50 does) or are you using one of the online solutions that will let you post into earlier years?

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Replying to accountantccole:
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By Newbie19
02nd Oct 2019 22:53

We are using Oracle and so have closed the previous year and so rolled forward the current retained earnings into the prior retained earnings

Hope this helps

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Culverwell Venge
By Culverwell Venge
02nd Oct 2019 08:26

If the auditors corrected that error, why did they not adjust the statement of changes in retained earnings or provide a schedule of these 'fixes'? They should have restated the retained earnings through that fix. Posting your journal without liasing with the auditors may potentially create problems later on.
For guidance check FRS102 Section 6 para 5 "...restatement of retained earnings for prior period material errors". Steve Collins has an article about errors published here.

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Replying to Culverwell Venge:
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By Newbie19
02nd Oct 2019 23:00

Correct the auditors have provided a schedule of "fixes" so that we arrive at the retained earning as per the Financial Statements but these throw our current year balance sheet figures (prepayments using the example above) and the only way I can see to fix this is to "clear" the difference through the P&L

If I was to do the below first

Dr Prepayments
Cr Retained Earnings

Followed by

Dr P&L
Cr Prepayments

Over the two year period the financial statements show a credit in the P&L in FY18 (audit "fix") and a debit in FY19 (retained earnings "fix")...............

Still learning so forgive me if I am not so knowledgable in this area

Appreciate everyones assistance in this

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Replying to Newbie19:
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By Sandnickel
03rd Oct 2019 06:51

How does it make your prepayments wrong, they have removed £10k so this should now longer be in your prepayments. Is this where you are going wrong?

Please ignore the frs102 comment it's not relevant.

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