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bigduckontax, Accountant
Category: Tax
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I am the sole director of a UK Limited Company. This company

Customer Question

I am the sole director of a UK Limited Company. This company is in its first year of trading and was incorporated on 11 November 2015. The company offers freelance media consulting.
Its first set of accounts must be made up to 10 November 2016, with an extra set of accounts up to 30 November to cover the period.
I am currently putting my accounts together and have encountered an issue. I have around £2000 in the company account currently at year end after withdrawing my salary and repaying the director's loan account. On paper this looks like retained earnings however part of this money is made up of deposits from clients for the future provision of services. The money was received last week but the services won't be delivered until 12 November (i.e. outside the dates of the first set of accounts). I have a number of suppliers to pay relating to the client's work, who will invoice me between 12 November and 30 November. Their amounts total around £1800.
Once the work is complete I will be invoicing my client for a further £2100, which I should receive before 30 November (i.e. before the end of the accounting period).
The issue I am having is how to properly record this income and the liabilities for the purposes of tax. I have received the client's deposit and have funds in the account, but this is not really taxable profit (at least as far as I'm concerned!!) because I have future significant expenses against this.
I have three questions relating to this:
1. What is the best way to record this in my accounts (i.e. balance sheet, income statement, etc)?
2. Can I record the expenses as accrued expenses before I have received any invoices for the accounts up to 12 November? If so, some of the expenses will need to be recorded as estimates - is this possible?
3. What is the best way for me to do this for the purposes of tax? For example, could the invoices from suppliers be back dated to before the end of the first accounting period?
Note: I want my accounts to be above board so don't want to do anything that would put me at odds with HRMC's policies. However I would obviously like to reduce my company's tax liabilities as far as possible within the law.
Submitted: 1 year ago.
Category: Tax
Expert:  bigduckontax replied 1 year ago.

Hello, I am Keith, one of the experts on Just Answer, and pleased to be able to help you with your question.

You are a Director of the company and thus an employee per se. Any salary paid to you must be made under PAYE arrangements. I do hope that this is the case. Repayments of directors' loans and refunds of personal expenditure made on behalf of the company do not, however.

1. Payments in advance may possibly have to be refunded so they are entered in your accounts as creditors payable within one year. When brought to account you merely Debit Creditors, Credit Sales.

2. Yes it is, but if the accrued expenses when the chips are down differ from the estimate there will have to be an adjustment. I would do this through a Profit and Loss Account Over/under ledger heading and bring it to account in the next accounting year. It is a perfectly normal practice.

3. As the payments in advance have been placed in creditors they will not come into the Corporation Tax (CT) computation. The estimated accrued expenses will reduce the company's exposure to CT.

I do hope that you have found my reply of assistance.

Customer: replied 1 year ago.
Hi Keith,Thank you very much for your rapid response. However I am slightly confused by the answers provided...I'm doing my accounts for the first time. Can you clarify your answers to the above in plain english (and more detail) so I know clearly how I would record the expenses at each stage? Please include any information that will be pertinent to next year's accounts.Note: I will not actually be paying my suppliers until after the work is complete and will not have received their invoices. Is this a problem?Thanks!
Expert:  bigduckontax replied 1 year ago.

For expenses for which you have receipts there is no problem. For suppliers where you do not know the actual bill, but have an idea of the cost then you post the item as Charge Cost of Sales, Credit Creditors. When these sums do become payable you merely Debit Creditors Credit Cost of Goods Sold. Any discrepancy would be written on of off using a Profit and Loss Over/Under Account in the next accounting period..

When you receive payments in advance you merely Debit Cash/Bank and Credit Creditors. When at a later stage these payments are actually for work done you merely clear Creditors and Credit Sales.

Is that a little clearer?

Customer: replied 1 year ago.
Hi Keith,I'm not sure how much clearer I can be: I will not actually be paying my suppliers until after the work is complete and will not have received their invoices. Equally I will not be sending invoices to my clients in advance of the work taking place.No funds will have left my accounts to suppliers.Do you understand? Are you able to help with my questions?
Customer: replied 1 year ago.
My point above is that I can't simply record it as a prepayment (as it isn't actually a pre-payment)? Or can I?
Expert:  bigduckontax replied 1 year ago.

In my opinion you can. Alternatively you can wait until the works are actually done and the supplies needed. As an accountant I incline to the former view as it will make the accounts more of a true and fair view of the situation.