Motor Insurance prepayment

System
System Posts: 100,534 🤖 Admin 🤖
edited June 18 in AAT member discussion
Looking over a friend's accounts (Apr 5th year end)I see his accountant has not included a prepayment for motor insurance but merely included in the accounts the annual renewable amount paid in August. Shouldn't there be 4 months prepayment? How will HMRC view this?

Thanks for any comments.

Comments

  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Motor Insurance prepayment

    Is the amount material?

    If it isn't, I'm sure Inland Revenue aren't going to care one way or the other! They will still get their money. It's just better accounting practice to prepay it as you have said.

    Annette
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Motor Insurance prepayment

    Thanks, Annette.

    The amount is £358, his gross fee income is £24000.
    What do accountants normally do?

    Thanks again
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Motor Insurance prepayment

    Don't quote me on this, because I am recalling it from my time as an AAT student which was a few years ago now, but I think this is about any necessary adjustment being material. Can anyone remind me what the rules are for materiality?

    That aside, and the answer your question "What do accountants usually do?", I have dealings with a dozen or more accountants and they have various ways of dealing with the year end requirements of their small business clients.
    Some will want to have a meeting with the client and/or me , then take away files and data for close scrutiny. Some will want the data file only (or hard copy reports - TB P&L and BS) and (hopefully) read my accompanying notes,then prdouce statutory accounts and tax calculations. Others have differing requirements and routines which fall between these extremes. I try to persuade the accountant to read my notes, which will include details of accruals, prepayments, depreciation etc.
    I feel the differing attitudes are attributed to personality of each party and the client/accountant relationship. Often, of course, the work done by the accountant reflects the amount of money the client is prepared to pay in fees.
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Motor Insurance prepayment

    Personally in that case I don't think I would have made an adjustment because in a normal year he would have paid for 12 months insurance, and you would be accounting for 12 months insurance (albeit not the SAME 12 months), so unless the actual increase in the premium is material (which you can only hope it isn't!!) then it seems like an unnecessary adjustment to make.

    As far as materiality is conerned, in the Auditing AAT text book it says that auditors calculate it as an average of :
    5% of Profit before tax
    .5 - 1% of GP
    .5 - 1% of turnover
    1 - 2% of total assets
    2 - 5% of net assets
    5 - 10% of profit after tax
    seems like a complicated process, I usually say £100 for small clients up to about £500 for someone with turnover of £100k - £200k.

    jodie

Categories

Privacy Policy