Question about unexpected invoice received for previous period

Rae_Rae

Hello,

Forgive me for posting in the wrong place but I can only choose from 2 categories when creating a new discussion and both are student ones. Can someone please move this to the right place?

My question

I passed my AAT level 4 in January 2023 but have not had change to put anything into practice until recently and I feel quite rusty in some areas so please forgive me if this seems a stupid question.

My company has recently received an invoice for electricity that covers the period 1 July 2022 to 30 June 2024.

This was unexpected as we have been paying electricity bills based on a meter each month and thought everything was in order. However, the building we are in also has three sub meters for three offices we rent which we were not informed of until a few months ago. It turn out the meter we were paying only covers the AC units.

We have since received an invoice for the two year period above dated 1 September 2024. We have negotiated a 50% discount since we were not informed until 2 years later of these charges and payment was requested by the building until last month. There is also a payment plan in place to pay this over the next 9 months which is outlined on the invoice.

My question is, should these charges be recorded in the years the the electricity was used, and if so, how?

OR

As the invoice is dated 1 September and has a payment plan in place should it be recorded in this year and if so how?

shamilkaria

Hi @Rae_Rae

I hope you are well?

So in terms of posting the invoice in your accounting system, you will post this invoice using the invoice date 1st September 2024 and the description will be Electricity Charges - Period 1st July 2022 - 30th June 2024.

The Nominal Entry will be (Remember DEAD CLIC / PEARLS if you want me to explain these to you do let me know) + Dont worry this is just for your knowledge as the accounting software will already do these entries for you when you post the invoice on the system:

Debit - Electricity (Expense Account - Expenses in accounting are recognised as Debit)
Debit - VAT (Liability Account - but will be debit if there is VAT on the invoice as it can be claimed back)
Credit - Purchase Ledger Control Account

In terms of the payment plan, once the invoice has been posted on the system, when the payment have been made just allocate accordingly and in 9 months you will see the invoice balance will reduce to zero.

For future recording as now you know that you will get this electric bill. Electriciy bills are usually recognised as an Accrued Expense because you will get an invoice after you have used the electricity but we need to account for this cost in the period we have used the service. So for example, you may use electricity in October 2024 but the invoice will not come to you until November 2024 but we need to still charge the electricity to October 2024. So we would accrue for this.

So for this electricity charge you will need to accrue going forward because you now know that this charge will be coming. So to do this, usually at the end of each month you will be posting a range of accurals you will need to add this too. So at the end of October 2024 you will need to accrue for July 24, August 24, September 24, October 24 because you have not received the invoice for this period. In order to calculate cost for these months it will be as follows:

First work out the number of days the invoice you have just received - 1st July 2022 to 30th June 2024 = 730 Days

Next to work out the cost - You always go with "Net" amount which will be provided on the invoice.

So to work out the daily charge it will be "Net" / 731 Days (because of leap year in 2024 otherwise it is 365 days x 2 year) = Daily Charge

Now we need to work out for July 24 (31 Days) + August 24 (31 Days) + September 24 (30 Days) + October 24 (31 Days) x Daily Charge. So this will be 123 Days x Daily Charge = Accrued amount in October 24

Next lets say you still dont receive the invoice in November then you will continue accuring for this cost then in November it will be 123 Days + November 24 (30 Days) x Daily Charge = 153 Days x Daily Charge = Accrued amount in November 24.

Lets say in December you get the invoice it covers July 24 - September 24. The accural will be just the same method that you applied earlier however this time it will change as we have received a new invoice. But same method

Number of days - July 24 to September 24 = 92 Days

Next the cost - Use the "Net" amount on the invoice

Daily Charge = "Net" amount on invoice / 92 Days = Daily Charge

Accural for December 24 will be - October 24 (31 Days) + November 24 (30 Days) + December 24 (31 Days) x Daily Charge = 92 Days x Daily Charge = Accured Electricity charge in December 24

Double Entry for Accrual is:

Debit - Electricity Account (Nominal) Debit as it is an Expense Account
Credit - Accurals Account (Nominal) Credit as it is a liability

Final thing with Accruals you will post them at the end of each month but then you have to make sure that you reverse them at the start of the following month this is because you are expecting to receive the invoice in the following month, if you dont then you will continue accuring. See below for an example.

Accrual

Debit - Electricity Account (Nominal) - £500 - 31st October 24
Credit - Accurals Account (Nominal) - £500 - 31st October 24

Then in November reverse it in the hope that we will receive the invoice to cover all these period if not then we accrue again end of the month

Debit - Accurals Account (Nominal) - £500 - 1st November 24
Credit - Electricity Account (Nominal) - £500 - 1st November 24

Then if no invoice accrue again

Debit - Electricity Account (Nominal) - £500 - 30th November 24
Credit - Accurals Account (Nominal) - £500 - 30th November 24

Then reverse

Debit - Accurals Account (Nominal) - £500 - 1st December 24
Credit - Electricity Account (Nominal) - £500 - 1st December 24

I hope this helps you out. I am sorry its a huge reply but I hope it helps you for the future too.

Kind regards

Shamil