Suppliers refunds

Morory

Hi, up to today, I have always credited suppliers refunds back into their account via add credit note using Sage, this in turn credits the Overhead expense account on the P & L. However, we have received a credit from our Gas supplier backdated four years as they have overcharged us. One of my managers feels this should be shown on the P & L in Miscellaneous Income, I do agree with their point as the supplier has refunded us direct in our bank, and if it credits the expense account it is not giving a true cost of the expense for the period. If this is shown in income, then all managers can clearly see we have had a refund and check notes produced with P & L. However, if this is credited to the gas expense, then they will think we have used less gas and query this.
Please could anyone advise me the best way to show this on the P & L, as I have always entered supplier refunds via credit notes on Sage, which in turn credits the expense account.

Many thanks

Maureen

Gem7321

Personally I would post it to the expense account and explain the discrepancy to the managers that the expense was overstated 4 years ago. Could you ask the managers how they would prefer for it to be shown?

Morory

Hi Gem7321, thanks, I agree, I too posted it to the expense account and noted that the credit was received, but 1 manager felt this was incorrect and it should go in Income. Is there a right or a wrong?

Dinky

I agree with the above suggestion as it is not income, but a refund of excess expenditure. In any event, there is an option in Sage to post the credit note to a nominal code of your choice.

Morory

Thanks Dinky, I agree, however, but really trying to establish if either is correct or incorrect as my manager will want me to prove which is correct.

Dinky

If it is for management accounts he can choose to do as he pleases, so if he wishes to show it as income or even as an extraordinary item, that is up to him. For the statutory accounts (assuming this is a limited company) the accountant can make the final decision but if it was me, I would go with Gem7321.

CeeJaySix

Morory, you're correct in that this would show an incorrect gas expense for the current period; technically, assuming all of the refund relates to prior periods, it's actually a prior period adjustment that should go directly against P&L reserves brought forward. However, unless it's a material amount, I have yet to meet an accountant who would actually do that as it's too much hassle; there's no requirement to do so as there's no material misstatement. Gem's approach is the most appropriate in my opinion for the reason Dinky states.

Morory

Thank you everyone, I have always credited the suppliers expense for refunds, so will suggest we continue that way, I do produce notes with accounts so hopefully that will be enough.

KernowAccountant

Absolutely, should be a credit to the expense account.

CeeJaySix said:

Morory, you're correct in that this would show an incorrect gas expense for the current period; technically, assuming all of the refund relates to prior periods, it's actually a prior period adjustment that should go directly against P&L reserves brought forward. However, unless it's a material amount, I have yet to meet an accountant who would actually do that as it's too much hassle; there's no requirement to do so as there's no material misstatement. Gem's approach is the most appropriate in my opinion for the reason Dinky states.

Sorry, but this does not represent a prior period adjustment. Materiality is not the only test.

FRS 3 defines a prior period adjustment as: "Material adjustments applicable to prior periods arising from changes in accounting policies or from the correction of fundamental errors. They do not include normal recurring adjustments or corrections of accounting estimates made in the prior periods.”
In turn, fundamental errors are defined as: "an error of such significance as to destroy the truth and fairness and hence validity of a set of financial statements".

Hence, as the credit is clearly not a change of accounting policy nor does it meet the definition it cannot "technically ... [be] a prior period adjustment".

Yours,

A. Pedant

CeeJaySix

Kernow,

Many thanks for the correction, and you are of course correct regarding FRS 3 / FRSSE. I was fully in IAS8 / FRS102 mode after recent exams and transition courses (which do demand prior period corrections in the first period in which a material error is discovered) - which I accept are unlikely to be the framework in use by the OP!