Question about expense invoice received that relates to a previous period

Rae_Rae

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 no payment was requested by the building until last month. There is now 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

Rae_Rae

Hi @shamilkaria ,

Thanks for the reply.

It's good to have a quick refresher on these area when I've not had to do them for a while. I've taken over from someone else and I'm trying to see how they have handled things in the past but some things are not how I remember being taught.

I think I just wanted to make sure that the unexpected invoice for the two year period from July 22 to June 24 that we were not aware of didn't need any adjustments making in any previous years accounts since we should have been accruing for these costs, and that it would just be posted as a normal expense paid off over the 9 months. Is that right?

I'll be accruing for the electricity bills going forward as we are now invoiced every three months in arrears. So I'll accrue each month for 1/3 of the future invoice and then release these accruals once we receive the invoice as you mentioned above.

Following from that, I know that it is proper practice to do accruals at month end and reverse on the first day of the next month, but is it absolutely necessary to reverse each month on a cost I know will not be invoiced for another three months?

I also have a quick question about prepayments. If I receive an invoice for a future period do I always post as a prepayment regardless of when that invoice is paid? and then reverse the correct amount from prepayment each month for that period.

For example, a 12 month water bill received in January that covers the next 12 months but paid by monthly DD in 12 instalments. Would this be posted in full to prepayments and then one month reversed in January as this period of the invoice has become current, even though we only pay one month at a time and not the whole invoice in full on receipt?

Thank you for you help
Rae

shamilkaria

Hi @Rae_Rae

Yes it can be difficult to remember everything from your studies. Plus worst part is that what you study and work is sometimes quite different.

That's correct you don't need to just the previous accounts because im sure the audits are done on it too, if you change anything in the past you can cause issues as your Trial Balance, Profit or Loss and Balance Sheet would all change. Just account for it in the current year and just allocate the payments according. You would just say this was an unexpected cost otherwise I'm sure you would have accrued for it.

Sorry for the full breakdown of accruals, when I explain something I try to provide a full breakdown.

That's good now you have a plan in place for the next invoice and have it accrued, that's correct accrue each month.

I have had a look around to see about accruals if they need to be reversed each month or not. You dont need to reverse it monthly but do remember if by month 3 lets say if by mistake you forget to reverse month 1 and 2 then your liabilites will be incorrect. Its more just about incase you forget you will give incorrect figures. In my opinion I would just do it monthly avoids any mistakes.

Right regarding Prepayments - Remember when you are posting these invoices on the system its not about the payment its about when you have incurred this expense. So for example you get a Water bill for 12 months in October 24 which covers - Nov 24 to Oct 25, even if you paid it in Oct 24 you still need to Prepay (Prepayment) for this because it covers 12 months, if you put the whole cost in Oct 24 that is incorrect even though you paid for it in Oct 24 in full.

So in order to do a Prepayment based on your Water Bill example starting from Jan for 12 months right to end of Dec and lets say the bill was £1,200 making it £100 a month (£1,200 / 12 Months), just remember other companies may base it on days, so in a year 365 / 366 (Leap Year) days, so they may do it like 31 Days in Jan, 28 Days in Feb etc. Best to remember monthly and days both ways just incase anywhere else you work they base it on days rather monthly. This example we will just use monthly so 12 months fixed per month So this is how we would post the invoice

On your accounting system post the invoice to Prepayments, see below the double entry. Based on your other question I assume you are not VAT Registered.

Debit - Prepayments - (Gross Amount if Not VAT Registered)
Credit - Purchase Ledger Control Account (Gross Amount)

Or

Debit - Prepayments (Net Amount if VAT Registered)
Debit - VAT (VAT Amount)
Credit - Purchase Ledger Control Account (Gross Amount)

Now that we we that this Water Bill is monthly, each month from Prepayments we will be releasing / reversing out of Prepayments and putting that amount to the Profit and Loss - Expense Code - Water Expense. But based on our example we have used £100 per month. So it will be as follows the Prepayment Journal

Debit - Water Expense - £100 (This increases the Water Expense Account - Expense Account on the Profit and Loss
Credit - Prepayments - £100 - (This reduces the Prepayments - Asset account on Balance Sheet)

Hope this helps you out with your question?

Kind regards

Shamil