Double Entry - Stuck!

SarahS

OK maybe I have been looking at this far too long but....

Just taken on a client with some messy records.

At the end of the last FY, no PAYE/NI liability was recorded and the account had a nil balance. However, during this year a payment of £1000 was debited to the PAYE/NI liability account and it's stuck there (corresponding credit to the bank). The payment does indeed relate to a liability of PAYE/NIC owed to HMRC with no accrual made last FY. Originally the entry would debit wages and credit net pay and the paye/ni liability account. Whether the original entries were ever made I don't know, the previous accountant deal with it then.

If I put a journal through to credit the £1000 in order to clear the liability account where do I put the corresponding debit? Part of it should go to wages (the Employers NI bit) even though it relates to last year but no idea where to put the rest?? If I debit it all to wages it's going to distort this years figures but can't see an alternative. It's an unincorporated assocation so not too concerned but I want to get it right as far as poss.

I think I need to go to bed now..i'm getting myself even more confused!

Monsoon

Ugh I hate these.

Did the brought forwards from the previous accountant include a figure for accruals? He should have provided a schedule for them too.

If all else fails, the Dr should go to retained profit.

Technically, if the expense was not accrued for then it needs to either a) be amended into last year or b) added into this year.

Are there tax implications of either?

There isn't an ideal answer, especially when you're not sure what happened last year. Can you ask the previous accountant?

sdv

SarahS wrote: »

......................a client with some messy records.

At the end of the last FY, no PAYE/NI liability was recorded and the account had a nil balance.

A very common problem when you take on a new messy clients records.

In the last FY accruals should have been credited and wages a/c debited. This did not happen and therefore profits were over declared last year.

SarahS wrote: »

.

However, during this year a payment of £1000 was debited to the PAYE/NI liability account and it's stuck there (corresponding credit to the bank). The payment does indeed relate to a liability of PAYE/NIC owed to HMRC with no accrual made last FY.

If I put a journal through to credit the £1000 in order to clear the liability account where do I put the corresponding debit?

You should debit the wages account with £1000. This will increase the wages expense and recover the under declared wages expense last year by over declaring wages expenses this year.

You will have one problem with this. You wages control account will not reconcille with PAYE reconcillition. You will have to put a note in your file workings to explain this as above. Should there be a query on this then the explanation is readily abailable.

SarahS wrote: »

...........The payment does indeed relate to a liability of PAYE/NIC owed to HMRC with no accrual made last FY. Originally the entry would debit wages and credit net pay and the paye/ni liability account. Whether the original entries were ever made I don't know, the previous accountant deal with it then.

Regrettably the previous accountants are unlikely to be helpful. If they have accounted for that £1000 correctly, then you should be able to find that on the balance sheet in the accruals account.

If your accruals b/f has been accounted for, then you can asssume that outstanding PAYE payments were not accrued last FY.

SarahS

Thanks - No accruals

Thanks for the replies.

There weren't any accruals at all. I did consider adjusting last year's profit figure but then I thought that the carried forward from last year won't agree to brought forward this year and creates another problem.

PAYE/NIC Liability b/f £1000 debit balance
I've posted an adjustment for the time being DR Wages £1000 and CR PAYE/NIC Liability which clears the problem but has significantly increased the wages bill for the year.

It's an unincorporated club and CT isn't an issue due to low profits however I want to get things as technically correct as possible. The club did their own payroll prior to me taking it on with the accounts so I suspect that they didn't even realise that an accrual was necessary but I would have expected the previous accountants to bring this to their attention. I did consider getting in touch with the previous accountants but I suspect they won't be much help as they didn't get involved with payroll.

The only thing that isn't ideal about DR the wages account is that strictly speaking some of that £1000 would actually be liabilities and not an expense (ie the employees tax and ni deductions). But in the overall scheme of things, I'm not going to spend anymore (unpaid) time looking at it and I think wages will have to take the hit this year.

I do question whether all of the necessary wages expenses were debited to the accounts last year - if the liabilities are missing then what happened to the corresponding wages entries I ask.

To make matters worse, all net wages were paid cash from bar takings so I've had quite bit of reconciliation work to do (Cash Control, Wages Control, PAYE/NIC control etc) and needless to say a few minor balancing adjustments along the way. Oh well, hopefully we're on the straight and narrow from now on!

Hasan.Ahmet

Sorry I don't wish to appear a smart so and so but;
The balance b/fwd in the PAYE/NI is not an accrual. It is a balance remaining unpaid for what's been crystalised. ie tax & employer's and employee's NI credited before paymen't made. May be that's what you meant but that's not an accrual. Accrual is something else.
You've not "cleared" the problem because the entries you've recorded do not represent the true position for what it is for now. For now the position is that a payment of £1000 has been made for PAYE and you don't know what this is for as yet. So I suggest you leave the original entries as they are until you discover what the payment is for before putting through the journals.
Can it not be an overpayment somehow somewhat?
If you must (And it's not necessary) have a zero balance in the PAYE you can put that £1000 in suspense until you discover what it truly is for.

Best wishes

SarahS

Appreciate your comments. It won't fully resolve the issue but as the PAYE/NIC payments that have been made in the current year relate to a previous FY with no details available or any creditor existing then it is a very tricky one to unravel!

coojee

SarahS wrote: »

The only thing that isn't ideal about DR the wages account is that strictly speaking some of that £1000 would actually be liabilities and not an expense (ie the employees tax and ni deductions). But in the overall scheme of things, I'm not going to spend anymore (unpaid) time looking at it and I think wages will have to take the hit this year.

I do question whether all of the necessary wages expenses were debited to the accounts last year - if the liabilities are missing then what happened to the corresponding wages entries I ask.

I suspect what happened last year is that the net wages were posted to P and L, ie DR wages and CR Bank so the fact that some of your £1000 is E'ees NI and Paye is not of concern. It wasn't DR'd last year so needs to be DR'd this year.

It's quite common for small businesses to account for wages in this way and not use the control accounts at all. If you were able to look back at previous years account I suspect you'd find that the net wages and the P and L payment were posted to P and L when paid rather than doing the more complicated journal to the control accounts. In this way there would always have been a PAYE payment at the beginning of the year that related to last year and a payment "missing" at the end of the year. As long as you have 12 payments in there (or 12 months worth of payments) then it's not an issue.

I've come across this many many times in the 20 odd years that I've been working. You have 2 options. You either continue to account for wages on a cash basis (it's clear you don't want to do this) or take the hit this year and have 13 payments in one year and then be correct from now onwards. As it's an unincorporated club you don't need to get bogged down in prior year adjustments. It would be wise to make a note to the accounts about it as there's bound to be at least eagle eyed member who'll spot it.

SarahS

Thanks

Thanks Coojee, yes that makes sense. I hadn't though of that.

I've contacted the previous accountants but the person who looks after this particular client is away. So I'm waiting for them to get back to me and then I'll know either way how the wages have been accounted for.