How to account provisions for future expenses ?
naylag
Member Posts: 8
Hello, I'm putting aside a fixed amount of money each month for my small business to pay for a large expense at the beginning of each year. It remains on the current account, so at the moment it is considered in the profit&loss. My financial year ends 30/06/2018, but the expense will only be paid in Feb 2019. I would like to show that it is not profit, but a future expense. How should I do it? Can I make a transaction between the income account and a current liability account (like an accrued expense)?
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Thank you for your help
Hi @naylag where is the money coming from? Is this from your sales this year?
If so, you would be able to create a journal transaction to DEBIT your income account and CREDIT a liability account to show that the amount is not income.
Yes from my sales, thanks @Erik !
I've got a question though. Will my P&L reflect my real annual sales in the end? I have basic knowledge of accounting, so not sure about the best way to go, and if its common to debit the income account... Thanks again
Hello @naylag I would create a journal that debits expense category and credits a liability account. For example if rent, debit rent in P&L and credit rent accrual in current liabilities.
I wound not debit sales as this would reduce the total value of sales which is not your intention.
Regarding accruals over the year end you would need to check the date that the cost relate to, shouldn't really accrue for next years cost in this year accounts...
Hi @JudeRose yes that would make sense.. However, the said cost is savings to pay for software license every year. We paid from our own funds at the start of the business in Jan 2018 for one year of license, then we started making savings from our sales. The next payment is Jan 2019 for the license of 2019 (accounting year is July 2017 to June 2018). So even if we actually pay in another accounting year, the money still isn't a profit in the current year... Does that make sense ?!
I would suggest putting the money aside from your business current account into a business instant access savings account (you’ll get some interest even its its small). You can move this back to your current account when needed and it is still part of your total bank/cash and doesnt affect your P&l or Balance Sheet. When you pay your software licence in Feb 2019 let’s say it is £1200, your transactions would be CR Bank £1200, Dr Software licences (expense) £500, DR prepayments (asset) £700. At the start of the following year CR prepayments £700, DR software licences, and repeat each year.That way you are accounting expense in the year it is due and any increases or decreases. It also allows you to account accurately if at a later date you change from an annual payment to let’s say a monthly cloud subscription.