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Invoice Date vs Payment Date vs Period

Lots of confusing definitions

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My accounts are prepared on an accruals basis and i'm self employed in the UK, not a limited company.

Expenses

What I often read is that

  • cash basis = payment date
  • accruals basis = bill date

But, there also seems to be another definition floating about

  • accruals basis = service delivery date or period

Where do these definitions come, why do they dither  and what is the truth about this?

I'm trying to broaden my understanding so that I can get the year end correct.

My understanding so far is that if a company sold a full set of ink cartridges and delivered them to a customer that

  • the seller of the cartridges would account for the expense on the delivery date.
  • the buyer of the cartridges would accound for the purchase over the period from when the cartridges are opened to when they are empty.

I'm in no way qualified to make these assertions so please come at me with how it really is. But does this, in terms of accruals accounting, render the invoice date and payment date irrelevent and therefore the first definition above incorrect. Of course I can see that these dates are still needed for record keeping but does what I'm saying make any sense.

Replies (19)

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By Accountant A
15th Jun 2020 20:25

0ih

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By antrace
21st Apr 2020 22:42

Thanks, I get your point. I would be interested in a good book on this topic more specifically and one with a UK focus. I think sometimes what seem like simple questions are more complex when you get below the surface. My aim here is to put straight what I see as contradicting information on the internet from different sources.

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RLI
By lionofludesch
21st Apr 2020 23:37

I'm not going to set up an accounting masterclass but here's an example.

You buy an insurance cover for the 2020 calendar year. Your year end is June. Half of the premium belongs to the year ended June 2020, the other half to the next year. You might have been billed that in November 2019 and paid it in December 2019 but that doesn't affect where the premium belongs.

If you're struggling with simple concepts like this, you need an accountant. Your choice, obviously, but if you decide to muddle through, it'll more than likely end in tears.

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By antrace
22nd Apr 2020 00:19

Thanks for the example. I'm pleased that your example concurs with my thoughts and perhaps some of the information on some sites is slightly misleading causing me confusion from time to time. I do have an accountant and i'm trying to provide as much information on year end items as possible for when I hand over the books so she can make adjustments etc. What I've done is create a custom field in the accounting software so that I can indicate if and why I think a certain expense could be 'moved' to a different account period. Essential I am flagging possible accruals as I assign the expenses from the bank feeds. She may or may not make the adjustments. I have improved over the years with the bookkeeping side of things but it's true that the simple concepts do still get me sometimes. Perhaps I know it but am not confident in knowing it. What I'm finging quite informative is the HMRC income manual which is talking about 'substance over form'. It all seems so subjective to me. Like the ink cartridges. Perhaps it's reasonable to expense them on the installation date as you could argue that you 'use' them when you install them, or perhaps you could say that they last a year and treat them the same as the insurance cover. Would either of those be wrong? it's my first time posting a question on here, and I can see why it may come across as nieve but I think even with bookkeeping software, accountants etc - it's important for business owners to understand the basic concepts.

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Replying to lionofludesch:
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By antrace
22nd Apr 2020 00:20

Thanks for the example. I'm pleased that your example concurs with my thoughts and perhaps some of the information on some sites is slightly misleading causing me confusing from time to time. I do have an accountant and i'm trying to provide as much information on year end items as possible for when I hand over the books so she can make adjustments etc. What I've done is create a custom field in the accounting software so that I can indicate if and why I think a certain expense could be 'moved' to a different account period. Essential I am flagging possible accruals as I assign the expenses from the bank feeds. She may or may not make the adjustments. I have improved over the years with the bookkeeping side of things but it's true that the simple concepts do still get me sometimes. Perhaps I know it but am not confident in knowing it. What I'm finging quite informative is the HMRC income manual which is talking about 'substance over form'. It all seems so subjective to me. Like the ink cartridges. Perhaps it's reasonable to expense them on the installation date as you could argue that you 'use' them when you install them, or perhaps you could say that they last a year and treat them the same as the insurance cover. Would either of those be wrong? it's my first time posting a question on here, and I can see why it may come across as nieve but I think even with bookkeeping software, accountants etc - it's important for business owners to understand the basic concepts.

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Replying to lionofludesch:
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By antrace
22nd Apr 2020 00:40

Thanks for the example. I'm pleased that your example concurs with my thoughts and perhaps some of the information on some sites is slightly misleading causing me confusion from time to time. I do have an accountant and i'm trying to provide as much information on year end items as possible for when I hand over the books so she can make adjustments etc. What I've done is create a custom field in the accounting software so that I can indicate if and why I think a certain expense could be 'moved' to a different accounting period. Essentially I am flagging possible accruals as I assign the expenses from the bank feeds. She can then use her knowledge and discretion. I have improved over the years with the bookkeeping side of things but it's true that the simple concepts do still get me sometimes. Perhaps I know it but am not confident in knowing it. What I'm finding quite informative is the HMRC income manual which is talking about 'substance over form'. It all seems a bit subjective to me. Like the ink cartridges. Perhaps it's reasonable to expense them on the installation date as you could argue that you 'use' them when you install them, or perhaps you could say that they last a year and treat them the same as the insurance cover. Would either of those be wrong? It's my first time posting a question on here so thanks for the response. I can see why my question may come across as nieve but I think even with bookkeeping software, accountants etc - it's important for business owners to understand as much as possible conceptually even if the bookkeeping will eventially be delegated.

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RLI
By lionofludesch
22nd Apr 2020 00:43

Well yes, of course there's subjectivity.

Accountancy is an art, not a science.

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RLI
By lionofludesch
21st Apr 2020 23:38

Duplicate

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JCACE
By jcace
22nd Apr 2020 00:48

Well done for trying to get to grips with this and for asking a question when you don't fully understand the answer, but are beginning to.
The accruals basis is sometimes also referred to as the matching concept so, as in the example given earlier with insurance, you match the expense with the period to which it refers. There will be some things that you pay in advance (eg insurance, subscriptions etc) and within the accounts, these costs might be paid in one lump, but accounted for through the P&L over the period to which the expense relates. Likewise, there will be some costs that are usually invoiced in arrears (eg electricity, metered water etc) and these would also be accounted for over the period to which the cost relates even though they would probably be paid afterwards. Sometimes when accruing like this, you can only estimate until such time as an actual bill comes in.
Some items that you might use over a period of time such as ink cartridges, would often be written off at point of purchase, but that would probably depend on how significant the cost was.
Hope that helps and happy learning.

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By antrace
22nd Apr 2020 02:25

Thanks for the help. So you choose at your discretion (and wisdom) the invoice date instead of using a period if it's a low cost item such as ink cartridges. What if it's a low cost item such as one month of a subscription (if it's split between months), would that be different because it has a more clearly defined service period or the same as the ink where you just use the invoice date?

Is every day important? Say the one month of a subscription is one or two days into the next tax year do you still adjust for this or is that mad? Where do you draw the line or do you get everything perfect down to the nearest day?

Just an added thought but I find it odd that none of the accounting software i've come across is able to work with date ranges in any built-in capacity so manual journals have to be made every time by my accountant. There's also no attempt for the software to even collect the date range which is odd considering how important it appears to be for working things out.

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By paulwakefield1
22nd Apr 2020 07:53

Technically yes every day is important and us accountants do have an eye for detail BUT hopefully grounded with an element of pragmatism and reality. Part of that is the concept of materiality. So, if an item is small in absolute terms or has a small effect (the one day idea in your example or the ink cartridges) then we don't bother with any adjustment. It doesn't affect the reader of the accounts.

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By antrace
22nd Apr 2020 09:41

Thanks for your point about materiality it helps my understanding somewhat. My receipts are generally maintained in order of invoice or payment date, accountants then make adjustments using their experience and wisdom, but later down the line if the receipts are requested in an audit how do you know which receipts are in what year on a receipt by receipt basis for those that have been adjusted? How do accountants generally feedback to bookkeepers which receipts should be moved to different (or split between) accounting periods?

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By paulwakefield1
22nd Apr 2020 11:49

Generally it is obvious from an accounting system. But, as long as your invoices are filed with a consistent system, it is fairly straightforward. As a rule of thumb, if there is an accrual, the relevant invoice will be filed after the year end and, if there is a prepayment, the invoice will be in the earlier year.

The invoices are not moved from period to period as such. An adjustment is made to the total for the year to increase costs for costs incurred but not yet billed at the year end or to decrease costs for costs incurred where some or all of it relates to a later period.

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By paulhammett
22nd Apr 2020 07:59

Antrace, some very sensible and practical advice for you there.

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Replying to paulhammett:
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By antrace
22nd Apr 2020 09:46

Yes thanks to you all here for the help. It really is invaluable.

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By tom123
22nd Apr 2020 08:19

Most businesses with a structured accounting department, who buy items on credit, will record first the invoice (say in April) and then the subsequent payment (say in May).

They will be doing this in real time, and producing monthly accounts.

For accountants in practice, operating sometimes months after the year end finished, they may tend (if doing bookkeeping) to just record the transactions by the date paid - with an adjustment at the year end for invoices received not paid.

Small entities (not companies) are entitled just to use the receipts and payment dates - but are not obliged to do so.

Using receipts and payment dates helps avoid having to pay VAT over on invoices to customers that have yet to pay you.

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By antrace
22nd Apr 2020 11:22

Thanks Tom, thanks for putting things into perspective. I didn't realise that people did this monthly. I can see the benefits of monthly accounts for reporting but I think I'd run out of money very quickly paying my accountant!

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By tom123
22nd Apr 2020 11:26

Come back when you are turning over a few million :)

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By antrace
22nd Apr 2020 14:54

haha That'll be the day!

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