Removing non-existent debtors

Monsoon

We've taken on a client who switched as they weren't getting a decent level of service. It's been over 3 months but we've finally just about got the professional clearance documents (!).

The accounts are showing debtors of ~£3000. We've been through the last two years, and there are no debtors as far as we can see, so we're not convinced that it's right. There is no point in going back to the previous accountant to ask him as I doubt we will get answers (I have a good knowledge of how this chap works, having seen his work before). I know from experience that he has a habit of doing accounts on a cash basis, not accruals (I know) but I'm not sure this is the case here as pure cash accounting can't result in debtors. We've not asked the client yet but I can 99% guarantee that they won't know what it is either (but will ask of course).

We've got the last two years' worth of source documents, so we're running a turnover test to see if the sales declared in the last set of accounts match what the client said. They're on flat rate VAT so we are taking that into account as well.

Question: in the absence of any 'eureka' moment, where would you put the debit to clear those debtors?

What would you do in this situation?

Monsoon

Monsoon wrote: »

We've got the last two years' worth of source documents, so we're running a turnover test to see if the sales declared in the last set of accounts match what the client said. They're on flat rate VAT so we are taking that into account as well.

Analysis complete and it makes no sense. Looks like prior years sales were overstated.

Should also point out the client is a Ltd Co contractor, so really simple accounts.

AK002

I would Dr the overstated debtors back into sales in the current year.

Sounds a bit dodgy though.

Overstated by the CY debtors less PY debtors amount? May have been cash accounting for VAT and accrual accounting for the debtors?

Monsoon

Looks like sales last year were overstated by £2000, and non-existent debtors of £3000, meaning a net debtor to eliminate of £1000.

Oh, and the rate of depreciation last year looks to be approximately 50%....! Which is higher than last year with no additions. Go figure...

Monsoon

Update:

We've gone back to 2009, have reconstructed the sales ledger control account correctly, and according to the previous accountant's figures (who only included 11 months in the 2009 accounts and then 13 months for the 2010 accounts, bringing in the missing month, we can prove this. 2009 was not the first year nor has the year end been changed).

His SLCA should be out by £300. It's not, it's out by £3000. His closing bank balance reconciles, his sales figures are 100% correct (unbelievably) yet the debtors figure is a total anomaly. Totally, utterly random. We can't work out how on earth he got it.

HALP!!

AK002

Any losses? Tax refunds?

Sounds a bit mikey mouse tbh.

KaySarah

Excuse me poking my nose in Monsoon - but if he's a contractor - could Retentions owing to subcontractors perhaps account for the unusual debtors? I'm clutching at straws here for you ..

Monsoon

No losses, no tax refunds.

KaySarah wrote: »

Excuse me poking my nose in Monsoon - but if he's a contractor - could Retentions owing to subcontractors perhaps account for the unusual debtors? I'm clutching at straws here for you ..

Not CIS, an IT-style contractor, so no deductions of that type, but thank you for the thought. We've gone back to the previous accountant asking for a debtors schedule. Don't hold up much hope but at least we've asked.

deanshepherd

I would probably assume it was accrued income (or Debtors: Amounts recoverable under contracts or whatever that Application note g described it as!).

Monsoon

Thanks Dean.

Sadly, it's not.

We've reconstructed the sales ledger and have proved the turnover figures are correct for the last accounts completed. It's not obvious what else could be wrong to get the debtors wrong. It's a very simple one-man-service-business limited company and there were definitely no debtors. No accrued income. The previous accountant says the debtors are sales invoices, but they aren't. Definitely not.

We are stumped. The previous accounts balance, but they are wrong. All the other figures on the balance sheet and P&L look reasonable, nothing else leaps out as to where the other side of the error could be.

The correct answer is of course to get us to re-do the last accounts but of course the client may not wish to pay us to re-do them when they've already paid someone else to do them, and been fined £375 for late filing of the accounts through no fault of their own (and are unlikely to get their money back or make a complaint).

If the previous set of accounts are not re-done, from a taxation persepctive it will be the client out of pocket not HMRC, so there is no tax evasion/ MLR issue here.

We need to get rid of these debtors as the alternative is to carry the figure forward ad infinitum.

What would you do?

The only solution I can think of is bad debts, and add back on the tax comp, but this will exacerbate an overdrawn directors loan account (due to reduction in reserves and thus dividends).

Argh!

Monsoon

duplicate.

mrb82

Could it be something to do with discounts or the incorrect VAT rate being used?

These are just wild stabs, I don't work in practice!

deanshepherd

Monsoon wrote: »

The only solution I can think of is bad debts

That's what I would do.

Monsoon wrote: »

and add back on the tax comp

I wouldn't add it back.