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This podcast selection is taken from a series of Business Hub radio shows broadcast on Star FM between February 2011 and October 2014 with advice from basic book-keeping through to crowd funding, directors loans, cashflow and a whole lot more!

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Business Trouble - your choices

Common Accounting Mistakes of Smaller Businesses - 5

The Business Hub Show - 13 October 2013

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Mark: It was going to be maybe 3 or 4 parts … but already we are at part 5 and there is more!

Just to prove that Accountants cannot count Mark!

The list continues to grow, and no doubt we will continue to find more and more.

Perhaps to explain the context of this series though. Typically here we are talking about micro businesses that are not yet at a stage where they can afford a full experienced accounts team, and are instead reliant on the owner manager “doing the books” or perhaps one full or part time accounts person. Most business at this level seem to try and do the job themselves, although some do hire a freelance bookkeeper to help them out. The huge mistake that is often made is that “doing the books” is seen as a chore, a necessary evil rather than a value added exercise that can add to the business.

This week I thought we would take a look at “missing and matching” … things that may be missing from your accounting records and the need to match costs over the time they relate to.

Mark: Why would anything be missing if everything is being recorded on a day to day basis as you have talked about over the past weeks?

I suspect that is what most people would think, and hence would expect their accounting system to give them an up to date and complete answer at any time. But, you remember my point from a couple of weeks back … don’t believe what you see.

The problem is that the day to day items, like purchase invoices and sales invoices, receipts and payments etc., do not cover all the entries that need to be in your accounts. Yes, these are most likely, the bulk of the items that are recorded, and in the main can be dealt with and indeed should be dealt with on a day to day basis. However, there are a number of other entries that are needed to ensure your accounts cover everything for your business, and these generally do not occur on a day to day basis.

Items that fall into this pot are entries for things like payroll (often just a monthly journal), depreciation of fixed assets (another monthly item), dealing with some loans, HP or lease payments, and accruals and prepayments. I will look at accruals and prepayments in a moment when we look at matching. In most cases the items I have just listed are monthly more “offline” processes that need to be recorded and accounted for but do not tend to follow the normal “flow” of the day to day transactions.

It is surprisingly common to see accounts with these items missing … and so the results can be misleading at best and downright completely wrong at worse!

Mark: OK, so that is the missing items, what about the matching?  You just talked about accruals and prepayments and said that they were to do with matching?

Another concept that if not properly followed which can seriously distort your accounts is not matching your costs to the time period that your accounts cover. Making adjustments through Accruals and Prepayments addresses this. The issue is that often you have costs that perhaps refer to a year, or perhaps a quarter, when you are normally looking at your accounts on a monthly basis.

An excellent example of this is the annual rates bill – or more correctly National Non-Domestic Rates NNDR. This bill normally is issued by your local authority in March each year covering the period from the April immediately following it for twelve months. For many businesses this can be a sizeable cost. It is not of course reasonable to recognise this in your accounts as a cost in just March each year, and then in the other eleven months of the year have no charge for rates. However, if no adjustment was made in your accounts to “prepay” this cost over the next twelve months this is precisely what will happen as the “invoice” from the local authority is processed like that. Therefore an accounting entry, a prepayment, is made to take out the annual charge in March and add back one twelfth of it in each month of the following year – thereby matching the cost to the month to which it actually relates.

The opposite of prepayments is accruals. Here, you may have a cost which is billed to you say quarterly but not until the end of that quarter – in arrears. The same argument applies it is not reasonable to just have a cost every three months after the event, instead you would make an accrual each month for the three months until the bill turns up and then take out the accrual (or reverse it as accountants often say). This applies often to things like electricity or telephone calls. Your accrual might have to be an educated guess or estimate of what the charge should be, but that is better than doing nothing at all.

So ... that is missing and matching!  Good ones to watch out for as they are often left out and can really mislead those looking at the accounts.

 

 

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