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Removing non-existent debtors

Removing non-existent debtors

We've taken on a client who switched accountants to us as they weren't getting a decent level of service; it's been over 3 months but we've finally just about got the professional clearance documents.

The accounts are showing debtors of ~£3000. We've been through the last two years, and there are no debtors, so we're convinced that it's not right. We've reconstructed the sales ledger and have proved the turnover figures are correct for the last accounts completed. It's not obvious what else could be wrong to get the debtors wrong. It's a very simple one-man-service-business limited company and there were definitely no debtors. No accrued income. The previous accountant says the debtors are sales invoices, but all invoices were clearly paid into the bank in the year, so there are no trade debtors.

They're on flat rate VAT so we have taken that into account as well, and that doesn't explain it either. The bank is reconciled.

We are stumped. The previous accounts balance, but they are wrong. All the other figures on the balance sheet and P&L look reasonable, nothing else leaps out as to where the other side of the error could be. I don't expect the previous accountant to either assist further or re-do them.

The correct answer is of course to get us to re-do the last accounts but of course the client may not wish to pay us to re-do them when they've already paid someone else to do them, and been fined £375 for late filing of the accounts through no fault of their own (and are unlikely to get their money back or make a complaint; for reasons I don't want to go into please take my word on this).

If the previous set of accounts are not re-done, from a taxation persepctive it will be the client out of pocket not HMRC, so there is no tax evasion/ MLR issue here.

My question is this: If the client won't get the previous accounts re-done, where would you put the debit to get rid of the debtors? The only solution I can think of is bad debts, and add back on the tax comp, but this will exacerbate an overdrawn directors loan account (due to reduction in reserves and thus dividends). Or carry the figure forward? Definitely not correct.

Any ideas?


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29th Nov 2011 15:43

Ask the client

Accounts Senior/Partner (Reviewing the accounts while not knowing the client or his business from Adam): Have you considered trade debtors?

Accounts Junior: Yes, there are none.

Accounts Senior/Partner: Don't be ridiculous. All businesses will have debtors. You ask the client while I go out for a "meeting". probably won't be back in today...

Accounts Junior: Hello, Mr Client? It's me from XYZ Accountants. Did you have any trade debtors at the year end?

Client: Eh?

Accounts Junior: People that owe you money?

Client: I don't think so.

Accounts Juinor. Oh, it's just that my boss thinks you might.

Client: Does he? I suppose he must be right, him being the accountant and all. Do you think £3k might be about right?

Accounts Junior: Yeah, great.








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By Monsoon
29th Nov 2011 15:50


Thanks Roland. Nice idea, but alas, this can't apply in this case. The turnover is right. The bank balance is right. The sales invoices were clearly paid into the bank in the year. Clear as crystal. Yet we are being told the debtors are sales invoices, which can't be right.

Previous accountant was a one man band.

We are of course going back to the client but, as you've indicated above, will they know the answer?!

Any further suggestions very gratefully appreciated.

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to Marion Hayes
29th Nov 2011 15:58

Ask the old accountant

Hello Monsoon

You've done your reconciliation, now ask the old accountant for theirs. A pity they didn't provide it with the handover information. What's the worst that can happen? They tell you to s*d off. If they don't come up with a satisfactory answer you can draw your own conclusions. I recently posted about the poor work of the previous accountant. The issues I quickly discovered were just the tip of the iceberg, and yes, the trade debtors were wrong too. We redid the accounts and the client was pleased that someone was taking the trouble to do the job properly.

I don't really know what you could debit instead, but are you sure it was not a deposit for something or an erroneous debit balance in trade creditors?


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By UK Tax
29th Nov 2011 15:54

Unbilled work? or......

It isn't UITF 40 / FRS 5 unbilled partly completed work at the year-end date brought at sales value is it? 

Failing that is it an entry brought forward?

How did the figure get into the client's records - what was the double entry made?



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By pembo
29th Nov 2011 16:01

stand back

Remember taking on a client from a big 4 firm many years ago with a similar mysterious debtor that was nearer £20k. The response from the senior audit manager was " well if its a Dr balance its got to be recoverable from somewhere" . Duh.

Standing back from this the first question is is it material to the true and fair view of last years accounts ? If not then QED no problem and write it off as a "bad debit" in this years accounts. For tax as every debit has a credit and notwithstanding your comment re fees a reasonable assumption is that the company was taxed on this at some point either as income or as a credit to expenses so I do not see why you should not presume to claim tax relief on the corresponding write off.

If it is material then a PP adjustment is the correct methodology rather than redoing the accounts with the comparatives restated on the current years accounts. The prior years tax comps are then resubmitted.

Unfortunate about the DLA but going back to the comment in my case current assets must be stated at the lower of cost and NRV. As NRV is £NIL you have got to write it off.

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29th Nov 2011 16:07

You may not like the answers

The other option is that the £3k was required to inflate profits for some reason - provide enough reserves to remove an O/D DLA etc.





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29th Nov 2011 16:10

Just a thought

Are you sure that it isn't an old overdrawn director's loan account that they haven't told you about?

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29th Nov 2011 16:10

Unbilled / accrued work B/F C/F B/F C/F ...

If an identical amount was brought forward from the previous year your turnover would agree to sales invoices raised. So what is the comparative debtor?

It could be that accrued income occurred a few years back and while none now exists the accountant has just carried it forward on an asumption.

If so I would be tempted to debit sales not bad debts.

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By Monsoon
29th Nov 2011 16:14

Thanks all

@UKTax - no, no WIP or accrued income. We've been told by the accountant it was definitely sales invoices, which we have proved it wasn't. The opening debtors were correct, which we've also proved. The accountant did all the bookkeeping, not the client. The client provides excellent records and the bookkeeping is relatively straightforward.


@pembo - it's reasonably material, sadly. But yes, it's correct to remove it from the accounts, absolutely. My thought about re-doing the accounts was because the previous CT600 has still not gone in. Yes, it's late, we know!

Normally I'd agree re tax deduction on write off, but as we've proved the turnover is right, and all the expenses seem in line with prior years (of which we have a few), I'm not convinced the other side of the error is in the P&L. Goodness knows where it is though... could be anywhere, really.


@andy.p - We have asked, more than once! We've been told it was just sales invoices, but no breakdown. Even if we had a breakdown we could still prove it wrong as it's that straightforward. It could be anything, is the frank truth! Who can tell? Tip of the iceberg indeed... I don't think it's a deposit (we checked income in to the bank) or trade creditors (there aren't any), everything else looks about right.

Thanks all for your comments, it reassures me that I'm not going (any more) mad, at the very least! :)

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By Monsoon
29th Nov 2011 16:18

And more...

@ Roland - possibly, but I don't thinks so - and no-one's going to own up to that one!


@ Moulsham, no the DLA is detailed separately.


@Mouse007 - no, it's defnitely not WIP etc or an amount carried forward. It was definitely generated in that year. We've proved we can't debit sales as that's definitely not the error. Sadly!


Thanks though, I'm glad I haven't missed a really obvious one.

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By pembo
29th Nov 2011 16:27

afterthought reading mouses comment

maybe this has been brought forward year on year as a UITF 40 estimate since 2005 so that it would not show up in your prior years reconciliations ? Practitioners were sometimes nervous and overly cautious about this standard when it came in. If so agree that a Dr to sales is probably the best solution on a matching/consistency basis and as tax rates have dropped no loss to HMRC.

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29th Nov 2011 16:33

Only one option left

No debtors B/F

Sales = invoices

No deposits

No prepayments

Only one option left, it goes to the director. You can not claim it as a bad debt because you have not established that the credit was income. Just explain the problem and cost (tax) consequence to your client and how it is necessary to get the accounts right.



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By Monsoon
29th Nov 2011 16:46

Only one?


It's a debit. We haven't established whether it's a DLA entry or an other expense that's not been claimed, so it's not necessarily DLA, surely?

Either way, I've just done some rough workings. It doesn't overly matter whether it's DLA or P&L.

If DLA, there are enough reserves to wipe the DLA out with a dividend (obviously s455/ BIK etc needs considering). If P&L, there are enough reserves to clear the lower DLA with a dividend (likewise with the considerations).

Thanks all. Much straighter in my head now. This place is great, you've all been a big help. :)

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29th Nov 2011 17:06

Only one

Because you don’t know.

I would avoid P&L as you could be inadvertently allowing the director to get away with some error which was in his favour. By posting it to the director there can be no tax consequences for and hence no complaint from HMRC. Indeed I think that is what they expect you to do.

Disallowing a P&L debit in the CT return overlooks the possibility of the director avoiding some other liability. Hitting the director with it covers off that risk. If it can be cleared up with a dividend and no higher rate tax, great.

When you don’t know, and have no clues, I always take the safest route.

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By Monsoon
29th Nov 2011 17:14

Good point.

Thanks Mouse. Yes, that makes sense and you're right, there's an extra level of safety in going DLA as opposed to disallowing an expense.

I'll come back to this tomorrow!

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29th Nov 2011 18:05

monsoon- Debtor balance

Numerous helpful comments.

As no b/fwd debtor

Bank reconciled.

SDB cleared by lodgements.

The other main area for review for originating entry surely is

Bank disbursements ?

PDB- are there any creditors.current year or prior

One man service company usually have to pay up front.


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By Old Greying Accountant
29th Nov 2011 18:37

Get the old accountants file ...

... the statutory duties of the director under the Companies Act trump all else.

If the accountants working papers are required to allow the director to fulfil his duties under statute in respect of keeping proper records and accounts he has the right to demand them and the old accountant is required under law to produce them to him!

Even a lien for unpaid fees will not mitigate that right.

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29th Nov 2011 20:29

Is there any mutual trading?

I inherited a client a couple of years ago where there were gigantic balances on debtors and creditors. On investigation it appeared that due to mutual trading, and the accountants inability to understand the contras, each year the debtors and creditors rose to be the other side of the entry made to increase sales and purchases.

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By zaidi
30th Nov 2011 11:05

did client issue any credit note to customer?
I think that it might be the case that your client issued an invoice and later issued the credit note or accepted the remittance of the amount less than the amount as per invoice.
If this is the case and he did not post the credit note, it means that he has a debit balance which needs to be cleared against sales.

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By Monsoon
30th Nov 2011 11:07

OGA, I think I love you :)

OGA, you're a superstar. Thanks for pointing it out - very useful!

@twickers, yes, quite possibly bank disbursements, but short of going through the whole of the previous year's bank (we aren't being paid to do that) we don't know. It's up to them whether we do that.

@Marion, no, but nice idea!

@Zaidi, thanks, but no.

Time to speak to the client, and try and get more working papers from the previous chap.

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By Old Greying Accountant
to ShirleyM
30th Nov 2011 11:51
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30th Nov 2011 12:30

One more option ...

I don't suppose its S419 tax paid on an overdrawn directors loan account from years ago which wasn't reclaimed from the tax office?


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30th Nov 2011 16:10

If it's not already covered above could it be an overpaid creditor/other debit in the creditors, which the previous accountants showed in debtors. I won't argue whether that is the right or wrong accounting treatment

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