How to spread the value of income and expenses to improve your cash flow using Accounting Start.
Description
How to spread the value of income and expenses across several months to improve your cash flow and get a realistic picture of your profits. Spreading the cost like this is known as making a prepayment or an accrual.
Resolution
What you need to know
If you receive an invoice or make a payment that covers several months, and you record it as a lump sum in one month, this can affect your profit for that month.
Rather than record it as a lump sum, use journals to spread the cost over the number of months the invoice or payment covers. This will give you a realistic picture of your monthly profits and how your business is performing.
Prepayments
A prepayment is when you pay an invoice or make a payment for more than one period in advance but want to show this as a monthly expense on your profit and loss.
For example, you pay your rent in January to cover the next six months (January to June). Instead of recording a single lump sum in January, you spread the cost across each month.
Accruals
An accrual is when you pay for something in arrears. This is where you are billed for something at the end of a quarter and want to spread the cost across each month.
For example, you receive an invoice for electricity usage in March for the period January to March. Instead of recording the whole value of the invoice in March, you estimate the cost and record a journal each month. When you receive the actual amount, you can make adjustments to the final amount.
These steps only apply if you make a lump sum payment and want to spread the cost. If you’re making a payment in in installments, you should record the payments as normal as and when you make them.
To record a prepayment, you need to:
-
Record the original transaction – When you receive the original invoice or make the payment, you should record this as normal as a purchase invoice or as an other payment. The steps below assume you’ve already done this.
-
Reverse the effect of the purchase invoice or other payment – Once you’ve posted the original transaction, you need to reverse the effect of it using journals. This moves the value from your profit and loss to the prepayments balance sheet nominal ledger account.
-
Post the monthly prepayment journals – After reversing the effect of the original transaction, you should then move the monthly values back from the prepayments nominal ledger account to the relevant expense nominal ledger account. You need to repeat this for each month affected by the prepayment.
Reverse the original purchase invoice or other payment
In the following steps, we’ll use the example that you make a 600 payment for rent in January to your rent nominal ledger account, 7100. This payment covers three months and you want to spread the cost to show 200 for each month on your profit and loss.
- From More, choose Journals, then New Journal.
- Enter the following information:
| Reference * | Enter a reference, for example, Rent prepayment. |
| Date * | Enter the date you want to use for the journal. This should be the same as the original transaction. |
| Description | If required, enter a description for the journal. |
- Enter the relevant information to reverse the original transaction, for example:
| Ledger Account* | Details | Debit | Credit | Include on VAT Return? |
| Prepayments (1120) | Rent prepayment reversal | 600 | | Leave clear |
| Rent and rates (7100) | Rent prepayment reversal | | 600 | Leave clear |
- Click Save.
You’ve successfully reversed the effect of the payment or purchase invoice. The balance now appears on your prepayment nominal ledger account on your balance sheet. To move the monthly value back to your profit and loss, you should now record the first monthly prepayment journal.
Enter the monthly prepayment journal
- From More, choose Journals, then New Journal.
- Enter the following information:
| Reference * | Enter a reference, for example, Monthly rent prepayment. |
| Date * | Enter the date you want to use for the monthly prepayment, for example, the last day of the month. |
| Description | If required, enter a description for the journal. |
- Enter the relevant information to record the monthly prepayment, for example:
| Ledger Account* | Details | Debit | Credit | Include on VAT Return? |
| Rent and rates (7100) | Monthly rent prepayment | 200 | | Leave clear |
| Prepayments (1120) | Rent prepayment reversal | | 200 | Leave clear
|
- Click Save.
You’ve now recorded the monthly prepayment. This reduces the balance on your prepayment nominal ledger accounts and posts one month’s value to your profit and loss. You need to repeat these steps for each month the original transactions covers. In this example, you’d post these journals for January, February and March.
To record an accrual, you need to:
-
Post the monthly accrual journal – To record an accrual, for each month affected by the accrual, you need to post a charge to a profit and loss nominal ledger account. The charge also posts to the accruals balance sheet nominal ledger account.
-
Post a journal to reverse the accrual – The balance on your accruals nominal ledger account increases each month until the final month when you need to reverse it. The reversal clears the value from the accrual nominal ledger account. When you view your profit and loss for the final month, the balance on the relevant nominal ledger account appears as a credit value. This is corrected when you record the purchase invoice or other payment.
-
Record the purchase invoice or other payment – When you receive the actual invoice or make the payment, record this as normal. When you record this, the final month’s credit balance on the relevant profit and loss nominal ledger account changes to a debit balance. As the accrual value is an estimate, the actual invoice or payment may be different. The difference appears in the final month.
Enter the monthly accrual journal
In the following steps, we’ll use the example that you pay for your electricity every three months in arrears. The average charge is 300 which you want to record as 100 a month.
- From More, choose Journals, then New Journal.
- Enter the following information:
| Reference * | Enter a reference, for example, Electricity journal. |
| Date * | Enter the date you want to use for the monthly prepayment, for example, the last day of the month. |
| Description | If required, enter a description for the journal. |
- Enter the relevant information to record the monthly prepayment, for example:
| Ledger Account* | Details | Debit | Credit | Include on VAT Return? |
| Gas and electricity (7200) | January electricity bill | 100 | | Leave clear |
| Accruals (2110) | January electricity bill | | 100 | Leave clear
|
- Click Save.
You’ve successfully posted the first monthly accrual. You need to repeat this for each month the final invoice or payment covers. As you post each monthly journal, a debit value posts to the relevant overhead nominal ledger account, in this example gas and electric, 7200, which appears on your profit and loss. The credit value posts to the accruals nominal ledger account and this appears on your balance sheet as the accrual is a current liability. At the end of the accrual period, you need to reverse the effect of these postings from your accounts.
Reverse the accrual postings
- From More, choose Journals, then New Journal.
- Enter the following information:
| Reference * | Enter a reference, for example, Accrual reversal. |
| Date * | Enter the date you want to use for the journal, for example, the last day of the month. |
| Description* | If required, enter a description for the journal. |
- Enter the relevant information to reverse the original transaction, for example:
| Ledger Account* | Details | Debit | Credit | Include on VAT Return? |
| Accruals (2110) | Accrual reversal | 300 | | Leave clear |
| Gas and electricity (7200) | January electricity bill | | 300 | Leave clear |
- Click Save.
You’ve reversed the monthly accrual postings and when you view your profit and loss for the final month, the balance on your gas and electric nominal ledger account appears as a credit value. To correct this, you need to record the purchase invoice or an other payment as usual. As the monthly accruals are estimates, it’s normal for the actual bill to be different from the values you posted. This difference is recorded in the final month when you enter the details of your bill.
Africa
Asia
Australia
Canada
France
Ireland
Kenya
Nigeria
Portugal
South Africa
Spain
United Arab Emirates
United States
Germany