Bank Interest Straddling FYE

mark057

Hi,

Can anyone advise me on how best to enter regular bank interest which straddles the FYE.

My FYE was on the 31st March however the bank interest was paid in early April. Some of the interest relating to March and some to April.

Should I attempt to adhere strictly to the accruals concept and apportion the bank interest in the bank interest account and cash book or just account for the entire amount in early April?

Help?

Mark

AdamR

I could be wrong, but I think non-trade investment income is accounted for using the receipts method ie when it actually turns up in your bank account.

mark057

Thanks.

I've looked everywhere and can't get a definitive answer.

qwerty

Use the accruals basis

Hi Mark

I found this info on HMRC's website:

http://www.hmrc.gov.uk/manuals/cfmmanual/CFM5100.htm

I have assumed you are dealing with a Limited company and you should therefore follow the accruals concept, meaning the interest will be taxed accordingly under the loan relationship rules. However, you may also want to consider materiality - would the interest really make a material difference?

AdamR

I still think if it's non-trade (ie just on the credit balance of a current or depost account), it should be receipts basis. It certainly is on personal tax...

Gem7321

Are we talking about interest receivable?

I've always done it on a receipts basis, but if the interest is material you could consider accruing

AdamR

Woo, at least some one thinks along the same lines as me!:laugh:

mark057

It has to be on a receipts basis doesn't it?

To apportion the amount would give me problems with the month-end bank recs too because I'd be receiving part of the money into the cash book before it had shown on the bank statement.

qwerty

I still think if it's non-trade (ie just on the credit balance of a current or depost account), it should be receipts basis. It certainly is on personal tax...

I agree, for personal tax, it is taxed on a receipts basis, but for a company you should accrue for the interest due to the company.

To apportion the amount would give me problems with the month-end bank recs too because I'd be receiving part of the money into the cash book before it had shown on the bank statement.

No, because the accrued interest would not hit the bank rec. You would debit accrued income and credit interest receivable. The interest would only hit the cash book once you actually receive the interest, at which point you would reverse the accrual.

blobbyh

Going slightly off topic, but I felt the accruals and prepayments concepts were very poorly taught at AAT level, especially the need to reverse them on the first day of the month.

For example, I suspect many people would post the annual business rates wholly to the prepayments for April, leave it there for the whole year and just take out a monthly charge for the P&L. They may not do the monthly back and forth swings. If you work with others, the reversals treatments may be explained but for those AAT's that work alone, this concept may be alien. Of course it's common sense when you think about it but I have heard comments by chartered accountants that many book keepers don't understand how to properly do accruals and prepayments.

mark057

If you paid your business rates in full and in advance for the year then you would be required to credit the cash book for the full expenditure.

Then I suppose you would debit the first months business rates expense to the business rates account.

The balance would then presumably show as a debit to the prepayment account and would be credited every month to transfer each months business rates payment into the expense account.