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Monthly profit figures, accrual accounting

Monthly profit figures, accrual accounting

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Hi, 

Can someone point me in the right direction please. I do bookkeeping for a small accountancy firm but feel it's a bit out of debth for me, so wanted to know how others deal with similar tasks. A client asked to give them their monthly profit figures. They are a haulage company and on accrual basis. The easy part is all invoices are dated when the work is carried out, the harder bit is to match expenses to months they actually relate. I am aware of accruals and prepayments concept from my AAT studies, but they have a HUGE amount of purchase invoices and I just don't know how it is done in real life. Receipts for petrol are fine as they are dated when used, but fuelcards invoices are all over the place, some invoices are issued weeks later, the same goes to some drivers invoices etc. Now for the purpose of figuring out what profit the company made, do others accrue and prepay every single invoice to get correct figures? It just seems suge a huge time consuming task.

 

 

 

 

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By williams lester accountants
28th Oct 2021 20:45

Management accounts when done properly are highly time consuming, which is why we charge a high price to produce them!

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Replying to williams lester accountants:
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By OllieT
28th Oct 2021 20:51

Unfortunately they are not the ones to pay such fees, but want to know if they make any profit if any. To make things worse they have their own spreadsheet that shows a complete opposite to what we have in our software as they record cash in and out of bank and now ask for answers, while explaining cash and accrual accounting doesn't answer the question if any profit was made

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By Leywood
28th Oct 2021 21:07

They want answers, then they must pay for you, or rather, pay their Accountant to do it.

But be careful, if you do not know what you are doing then could be in breach of ethics and your prof body can take action against you. Plus your PII might not cover it.

Or are you an employee?

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By OllieT
28th Oct 2021 21:21

I am an employee. An accountant I work for tends to focus more on high value clients, while I was given this task as a learning opportunity.

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By Leywood
28th Oct 2021 21:40

Sorry, just re-read your initial post properly and realise you are an employee of the accountancy firm whose client is the haulage company.

You need to involve your boss as to how to meet the needs of this client, whilst ensuring your firm is remunerated appropriately. Your boss will then decide what level of added work can be done on this file and in what format it can be done/ to what kind of detail.

Your supervisor should then be able to provide some additional training for you. If you are struggling you must let them know so they can put the necessary training in place and are aware and do not leave you floundering as that is not good for anyone.

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By OllieT
28th Oct 2021 21:51

Thank you for taking your time to reply.

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By OllieT
28th Oct 2021 21:21

I am an employee. An accountant I work for tends to focus more on high value clients, while I was given this task as a learning opportunity.

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By David Ex
28th Oct 2021 22:45

OllieT wrote:

… I was given this task as a learning opportunity.

Hopefully the comments here will give you a basis for discussion with your manager. As we all recognise, it’s a job that needs to be planned accordingly to the client’s budget and other requirements. Giving you some nebulous brief and describing it as a “learning opportunity” is disingenuous. The accounting is one thing; this situation needs some serious client discussions before you can do your job.

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Replying to OllieT:
RLI
By lionofludesch
29th Oct 2021 18:47

OllieT wrote:

Unfortunately they are not the ones to pay such fees, but want to know if they make any profit if any.

Lots of people want things they can't afford.

Most of them do without.

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By David Ex
28th Oct 2021 20:55

Decide what the material items are and focus on them.

As wla alludes, there’s a cost/accuracy trade off - and, indeed, a time issue to consider. If they want accounts on working day 2 of the following month, they won’t be super accurate.

You need to ensure you and your client know/agree what the scope and limitations of your work is.

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By OllieT
28th Oct 2021 21:09

Thank you for your reply, you are right, there is no simple/cheap answer - for the client to this.

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By Paul Crowley
28th Oct 2021 20:59

This just is not viable withoutsignificant time spent
Alternatively just consider if a cash flow analysis is acceptable

As per Williams it is time and money

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By Hugo Fair
28th Oct 2021 22:59

And ... just a thought (for when you're discussing this with your manager) ...
* Do you think the client is willing to learn/understand what the accrual accounts show them?

If not, your manager might like to offer them:
a) Quarterly (or even 6-monthly) Mgmnt accounts +
b) Monthly 'variance' reports that show (on book-keeping basis only) any significant variation from 'normal' (where this might mean comparison with same month last year or just with last month or ..)

I once did this for a company who really only understood cashflow accounting but, like your client, wanted to know their (likely) profitability - without going through the pain of learning about 'real' accounts.
They took to it like a duck to water and found it really useful!

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RLI
By lionofludesch
28th Oct 2021 23:56

Will they take stock every month?

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By paulhammett
29th Oct 2021 08:03

Unlikely, but for a haulage company, stock is “probably” not significant.

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By OllieT
29th Oct 2021 18:36

They have no stock

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Replying to OllieT:
ALISK
By atleastisoundknowledgable...
29th Oct 2021 23:20

Not a fuel bunker on-site? How big a company are they - what’s their turnover? Fuel in trucks might be considerable if there’s a large number. I had a client with c£20k file in a bunker and c£10k in trucks each month end.

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By OllieT
30th Oct 2021 07:22

They are not huge, they average yearly turnover is about 200 k, but it is increasing monthly, all their vehicles are vans, not trucks.

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By tom123
29th Oct 2021 08:29

Do the haulage company have their own onsite fuel bunker?
If they do, then you might want to incorporate that into your thinking on stock.
Fuel cards - use the statement from the fuel card, which will be your VAT invoice. Don't mess about with the bits of till roll.

Prepayments - I imagine their insurance premium will be significant.

Accruals - what you are really getting at is matching cost of sales to income.

What is the margin in the P&L looking like before you start.

Presumably you are using proper book keeping software that can produce monthly column reports?

Start with what reports are already available to you.

If the client wants better reports he needs to get you better records to start off with.

He can have quick/accurate/cheap but not all at the same time.

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By OllieT
29th Oct 2021 18:49

Thank you Tom123. We use Xero and disciplined them quite well in the last year to provide all receipts and invoices. Yes, insurance cost is huge and also all their vehicles are on hire purchase, so this is a significant monthly cost, althoug only interest element hits P&L. They make zero profit according to our records, but argue it as per their cash spreadsheet profit is quite good. Last year we used P&L figures, adjusted all the costs in excel to months they relate, included all hire purchase and it worked, but as turnover grew and expenses grew as well, this 'method' doesn't seem to work any more

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By lionofludesch
29th Oct 2021 18:57

It should be possible to isolate the differences using an adaption of variance analysis.

Depreciation might be a big part of your discrepancy.

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By paulhammett
29th Oct 2021 19:16

Lion is right Ollie. You need to charge depreciation as well as the interest payments to P&L.

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ALISK
By atleastisoundknowledgable...
29th Oct 2021 23:24

If they’re anything like the haulage companies I’ve had, they’ll want the truck dpn to match the capital HP payments, so that P&L cost = Depn + interest = monthly cash payment. Makes it easy for them to understand.

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Replying to atleastisoundknowledgable...:
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By OllieT
30th Oct 2021 07:10

Great tip re depreciation, thanks

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ALISK
By atleastisoundknowledgable...
29th Oct 2021 23:27

Make the drivers put the trip date(s) on their invoices, then you’ll be able to quickly see what to accrue if you include this in the Xero narrative.

Have a appoRtionsment control account for the insurance (assuming they pay over 10 months via Premium Credit or some such)

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Cloud Computing
By ngaccounts
30th Oct 2021 22:10

If you're not able to accurately determine when costs were incurred (late invoicing for example) then use proxy's. So for fuel, take mileage readings at end of each month & then multiply by avg fuel consumption x average cost p/litre.

If you find your accrual is jumping about each month then may well be your assumptions are out.

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By Tax Dragon
31st Oct 2021 09:23

Some pragmatic, sensible-sounding advice. As a lay reader, the thoughts that occur to me include:
- is there not already an established approach? It may be your first year doing this, I'd be surprised if it's the first year your employer has provided this client with this service (in fact your reference to past methods seeming to give increasingly poor results suggests it's not)
- if, surprisingly, it is the first year, then the above advice about getting the client in before you put spade to the mountain of receipts and discussing what they actually need (as opposed to what they think they need) has to be spot on
- if it's not the first year, you could suggest a client meeting to the boss anyway, to review whether what is being provided could be simplified (eg per Hugo)
- is that mountain actually as mountainous as you suggest? A £200k t/o haulage company surely isn't really churning 1000s of tanks of fuel every month. Or are the drivers topping up every time they pass a fuelling station?
- in fact, if they were doing that, it would probably smooth out the cost anyway. Unless mileage (use mileage, as above) varies massively month to month, fuel use won't. Lumpiness of outlay could come from few, large tank-fills, rather than 100s of tiny top-ups. (Either way, taking account of the fuel in the tank as stock as per the above will again smooth out the monthly results)
- smoother results may enable/justify simplification of service, as above
- are the drivers employees?
- when you say haulage, do you mean delivery?

Edit - oh, and it seems ngaccounts made much the same point about smoothness/irregularity, with greater succinctness than I achieved.

Edit 2 - in fact, reading my own thoughts back, I wonder what the client is hoping to achieve with this analysis - and indeed whether monthly management accounts prepared on the cheap and showing monthly fluctuations that don't really exist are the problem rather than the cure.

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By Tax Dragon
31st Oct 2021 09:33

On my edit 2.... MTD, anyone?

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By tom123
31st Oct 2021 12:33

Taking the year as a whole, is the business profitable?

£200k turnover is surely only a couple of staff?

Maybe they are not actually breaking even?

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By OllieT
31st Oct 2021 20:55

This is the thing, they joined us last year when they only started trading, the volume has grown times 5 roughly, but if we count average yearly profit they made none, they broke even indeed. Their margins are not hight enough I think.

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