Deferred Payments

[fin]

I am having trouble with my accounts with regard to deferred
payments. My understanding is that if you receive payment for goods
or services early (i.e. in my case two weeks before my year end 2007)
and if these goods and services have not yet been supplied (not until
a couple of months after my year end i.e. in my 2008 accounting
period) then these are handled as deferred payments and should not be
included in ones profit and loss account for the 2007 year end. If
they were included surely this would mean inaccurate accounting in
that you have a great profit in one year and a loss in another??

Can anyone clarify this situation for me?

 

[Ronald Raygun]

I am having trouble with my accounts with regard to deferred
payments. My understanding is that if you receive payment for goods
or services early (i.e. in my case two weeks before my year end 2007)
and if these goods and services have not yet been supplied (not until
a couple of months after my year end i.e. in my 2008 accounting
period) then these are handled as deferred payments and should not be
included in ones profit and loss account for the 2007 year end. If
they were included surely this would mean inaccurate accounting in
that you have a great profit in one year and a loss in another??

Can anyone clarify this situation for me?

You are right, it would distort the accounts and give a falsely
greater profit in one year and a smaller one in the other.

You deal with this in a way similar to how accruals and prepayments
are dealt with in your expenditure.

You introduce a new balance sheet account called something like
Payments Received in Advance. If the transaction was initially
misbooked as

Cr Sales
Dr Bank

then you need to "undo" the sales income

Dr Sales
Cr Payments Received in Advance

If you catch it early enough, and didn't put it through Sales,
you can just directly do

Dr Bank
Cr Payments Received in Advance

Because Payments Recd in Adv is a balance sheet account, it won't
affect the profit calculation.

 

[Martin]

You are right, it would distort the accounts and give a falsely
greater profit in one year and a smaller one in the other.

You deal with this in a way similar to how accruals and prepayments
are dealt with in your expenditure.

You introduce a new balance sheet account called something like
Payments Received in Advance. If the transaction was initially
misbooked as

Cr Sales
Dr Bank

then you need to "undo" the sales income

Dr Sales
Cr Payments Received in Advance

If you catch it early enough, and didn't put it through Sales,
you can just directly do

Dr Bank
Cr Payments Received in Advance

Because Payments Recd in Adv is a balance sheet account, it won't
affect the profit calculation.

Assuming that OP is not VAT registered. Otherwise a Tax Point may have been
created when s/he was paid, requiring some further entries....

 

[fin]

Assuming that OP is not VAT registered. Otherwise a Tax Point may have been
created when s/he was paid, requiring some further entries....

Luckily no VAT to complicate matters further - I will now look at
trying to record this on my very basic account package correctly!!
(my accountant did not seem to have any knowledge of this process?!)

Many thanks,
Fiona
Fiona

 

[PeterSaxton]

Luckily no VAT to complicate matters further - I will now look at
trying to record this on my very basic account package correctly!!
(my accountant did not seem to have any knowledge of this process?!)

Many thanks,
Fiona
Fiona-

The best way to do it is to post the payment to the sales ledger and
then when you do the statutory accounts you isolate the credit
balances in the sales ledger and increase both the trade debtors and
trade creditors.

I'd worry if an accountant doesn't have this knowledge.