If you want to go with @Brucanna method, you do a journal entry dated last day of the year and credit Accruals and Deferred Income and debit Accounting Fees and then when the invoice comes you pay the invoice and allocate to Accruals. Or you can do what my accountant did and do the above Accrual and then on the 1st day of the new year, you create another Journal Entry and you reverse what you just did i.e you credit accounts and debit Accruals and Deferred Income. Then when the invoice comes you just allocate to Accounting Fees.
I prefer the reverse journal entry because if your invoice comes six months later you donât have to remember to allocate to accruals and deferred income and it means that your accounting is consistent in that you always allocate your accounting bills to accounting fees! But if you do it the way I do it, then ssssh, donât tel Lubos and Brucanna, otherwise you will get shouted at ( as they donât like the second method.
Lubos said that one day he would do introduce a new method of doing this so you would just do one Journal Entry (but no reverse entry) and I presume that you would allocate to Accounting Fees in the normal way and the system would recognise the amount in accruals and deferred income and balance it out? I donât like their method because it relies on you remembering to debit accruals and deferred income and not accounting fees for that invoice which could be months away!
Remember to create Accruals and Deferred Income in Liabilities.
Correction. She actually said it was one of the few programs that includes purchase orders. All accounting programs include Purchase Invoices! I obviously misheard what my accountant said.
The best way to take up the previous year accountancy fee is to create a Journal dated the last day of the year as follows. As you are unregistered for VAT the amount will be the total expense - including the VAT,
1st line P&L - Accounting Fees - Debit amount
2nd line - BS Liabilities - Accruals - Credit amount
As for the current year you can either reverse the above Journal on the first day or post the invoice when it arrives directly to the Accruals account. Modern thinking is to do the latter, my next will explain why.
This is exactly the problem with reversals and why @lubos stated earlier âdidnât like how accountants were abusing reversing journal entries to the point that P&L looked ugly and illogical for better part of the yearâ
In your case you only have one accrual and based on the your six months example that would mean your Accounting Fees account would be in credit/profit for this period - hence illogical.
Now lets assume that your accountant did 6 or 10 accruals for the year end, then you could have up to 10 expenses accounts in various states of credit/profit or understated due to new transactions - hence ugly and illogical. Do you want to be using a calculator to determine your correct P&L position, kind of defeats the purpose of using accounting software.
So by leaving all that prior year accrual chatter in the BS, your current year P&L would be clean/unpolluted.
Now to clarify upon your âI didnât really understand anything you just saidâ comment with regards to underutilised advantages of the Balance Sheet. Instead of having one accrual account you could have an accrual section/group in the BS Liabilities with each accrual having its own account: Accrual Accounting, Accrual Electricity, Accrual Telephone etc etc.
So every time you see the Summary BS it talks as to the status of the various accruals so there is no need to remember how/where to post - the invoiceâs arrival âshouldâ provide instant recognition.
PS: Accruals and Deferred Income - traditional terminology receiving a resurrection.
I think that I am beginning to understand what you mean about using the BS to track accruals, although I think Lubos is going to be implementing his idea in a slightly different way. My guess would be one accrual account in BS, but the program will intelligently see that accounting fees have been moved to accruals and when the invoice comes will balance it out? I do see what you mean, that would be a cleaner solution in that you get things off the Profit and Loss for the following year, but I think the program will need to be able to help the end user by somehow intelligently allocating the accounting fees bill which arrives six months later to the accruals account or some method like that. It addresses the points that I made.
You are mocking my accountant arenât you! Actually in a way, I regards what you say as a positive point as it means that she has many years experience at this job. Not that I doubt that. I know enough about accounting to know when an accountant knows what they are talking about and she clearly knows her job.
I have now set my date to start from the 1st of this month and I see what you mean! Everything in P&L is cleared except for that accounting entry which shows a profit! Ya, so I do see that its not quite desirable that way.
Hopefully for next year, Lubos will have introduced whatever he is planning to introduce and then I can move away from reverse journal entries as I am seeing that it would be preferable to keep that on the BS and start with a fresh P&L each year.
Although when one thinks about it, the previous years P&L isnât really accurate either as its recording less income because of that accounting bill, but the accounting bill has not actually been paid yet, so I actually had more money as in real profit per se than the accounts were actually recording for that year.
But in the main, yes I think that I agree that the approach should be to get it out of the following years P&L. I will request that for next years end of year return.
I know you know this, @dalacor, but thatâs just the difference between accrual and cash accounting. This may be hard to get used to since, in our personal lives, we are so familiar with cash accounting. Itâs important not to mix the perspectives. Both are legitimate, although in the broad sense accrual gives you a more complete picture. Remember that while your cited example with accounting fees may seem to distort things in one direction, something else might seem to distort in the opposite. For example, in one year you might grumble at paying income tax on money you havenât received. But in the next, youâll be happy to receive money that seems untaxed. It all works out in the end.
Your previous year P&L is more accurate, not less, as it is including the costs associated with that financial year. In fact, under cash accounting, your current year P&L would be more inaccurate as it would be including costs which related to the prior year.
E.g. - lets say, that in the last month of the financial year the vehicle was serviced 300, telephone & electricity bills of 250 and stationery of 150 occurred and remained unpaid until the next financial year. Here is 700 of valid current year costs that wont appear in the current year P&L under cash accounting, which in turn, inflates your current yearâs profit creating a higher tax bill.
Furthermore, before the new financial year has even started the P&L for that year will be burdened with 700 worth of expenses when those bills are subsequently paid, how to start the year with a loss. On the other side, there could also be income distortions due to the cash accounting but the impact of those will depend on your ratio of cash 'vs credit sales.
In my view, cash accounting should be cast off somewhere beyond Pluto as cash accounting distorts reality (an income/cost transaction occurring today doesnât become an accounting transaction until itâs received/paid date) whereas accrual accounting is reality (an income/cost transaction occurring today is an accounting transaction today).
@dalacor - as an exercise, change your set period back to last year and switch between cash and accrual basis to see the impact.
You could delete the current year reversal Journal right now, which will have absolutely no impact on your accounts. It just means posting the accounting fee invoice to the accruals account which somehow I donât think you will forget after these discussions.
While I agree the ability to add supplier/account/customer on the fly is great, Iâd like to point out that you can right click on any hyper linked part of Manager and open another browser tab. Hopefully this will ease some pain before the feature is introduced.
For instance, Iâm issuing an invoice and already filled out the sales items lines but suddenly find the customer does not exist yet(weird, I know). I could right click âCustomersâ and open another tab and create a customer there. Then come back and finish the invoice entry.
Tax liability or any liabilities other than Accounts payable transactions are not individually tracked. Therefore assigning a Open/Close status to them is not possible.
However your problem is easily fixed by creating periodical Tax Recon Reports.
Well my accountant obviously has some thing in VT that can do the job regarding âopen entries.â I suspect its more of a case that it does the same thing in VT, but just works differently.
I did not know that and I right click and open new tab on the Internet all the time. Never even occurred to me that I could do that in Manager, but makes perfect sense as Manager links are basically hyperlinks! Good tip!
I have gone with your suggestion and deleted the reverse accrual and made my P&L fresh and clean for the new year. As I am getting the accounting invoice shortly, it wonât be sitting in accruals for long anyway.
Its only a toggle of a selection, no other effort required. I have always been at a loss to understand why a business (especially a corporation) who purchases/sells anything on credit terms wouldnât want to know their up to date financial position. Waiting until the payment/receipt occurs just causes so many distortions.
E.g. - In the first week of the month you introduce a brand you Inventory item which you donât have to pay for until the 20th of the following month. A Customer buys it almost immediately for cash.- your P&L Sales is increased immediately but your P&L COS (COGS) doesnât get adjust until a month and half later - in between times one is celebrating the illusion of their profitability. The higher the selling price the bigger the illusion.
as they donât like the second method.