Prior year overstated debtors

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kellyp
kellyp Registered Posts: 44 Regular contributor ⭐
in General accounting discussion
Hi
I have recently gained a new self employed client as his previous accountant moved away.
The debtors figure is £18000 in the balance sheet but this includes £7000 of sales invoices that were in fact paid before the year end...

Any thoughts on how I go about correcting this??

Thanks in advance

:confused1:

Comments

  • coojee
    coojee Registered Posts: 794 Epic contributor 🐘
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    Were the receipts included in last years accounts in the bank figure? If they were you need to find out where the double entry went, DR Bank and CR what? If there was no credit then the accounts wouldn't have balanced. Wherever the credit went is what you need to DR this year and then CR SLCA to remove them from debtors. If they weren't in the bank last year then it's easy because your bank account will also be incorrect so you need to correct both accounts.
  • kellyp
    kellyp Registered Posts: 44 Regular contributor ⭐
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    Yes the bank figure is correct.
    Will I need to contact the previous accountant to find out what the CR was? or do you think its easier to physically go through the sales invoices for the prior year and see what has happened? (is it likely to have been an overstatement of the sales account?)
    Thank you for your help.
    K
  • coojee
    coojee Registered Posts: 794 Epic contributor 🐘
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    At a guess I'd say they'd been posted to sales as a cash sale so sales were overstated last year. How far you go to find the CR entry depends on how material the error is. £7,000 out of £18,000 debtors is quite material and if debtors were only £11,000 then it sounds like sales are quite low as well so a £7,000 overstatement of sales is also material. I think you need to investigate more. If you were to just write off £7,000 from this years sales figure it will look odd if sales are low anyway.
  • kellyp
    kellyp Registered Posts: 44 Regular contributor ⭐
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    I have finally received some information back from the previous accountant...but not much!
    I am still really confused..... they have calculated the Sales as: Debtors b/fwd plus income for the year less Debtors c/f

    Surely the sales figure should just be what was invoiced during the year?
    HELP!!
  • Monsoon
    Monsoon Registered Posts: 4,071 Beyond epic contributor 🧙‍♂️
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    kellyp wrote: »
    I have finally received some information back from the previous accountant...but not much!
    I am still really confused..... they have calculated the Sales as: Debtors b/fwd plus income for the year less Debtors c/f

    Surely the sales figure should just be what was invoiced during the year?
    HELP!!

    Sounds to me like there is room for error in their methodology, so I would trust your gut and possibly have to restate sales. More investigation needed.
  • kellyp
    kellyp Registered Posts: 44 Regular contributor ⭐
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    Thanks very much for the reply. I thought I was going mad.
    It seems they have based the sales figure on 'accounts receivable' during the year rather than actual sales. I.e. Cash basis instead of the accruals basis.
    I have debited the sales account this year to correct the error as the over stated debtors has had an effect on their sales figure for last year.
    The former accountancy firm is a relatively large company and is quite worrying that they could have over-stated the debtors by £7000!
    Have you ever encountered this sort of thing before?
  • Monsoon
    Monsoon Registered Posts: 4,071 Beyond epic contributor 🧙‍♂️
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    kellyp wrote: »
    Have you ever encountered this sort of thing before?

    Yes. Just because they are a large firm, or chartered, or well established, doesn't necessarily mean their accounts will be perfect. Get used to it :)
  • DAVID LAWES
    DAVID LAWES Registered Posts: 29 Regular contributor ⭐
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    Prior year overstated debtors

    It seems they have based the sales figure on 'accounts receivable' during the year rather than actual sales. I.e. Cash basis instead of the accruals basis.

    I hate making what my Intermediate level tutor used to call an ASBO (A Statement of the Blindingly Obvious), but accounting for credit sales is a 2-stage process. For simplicity's sake let's assume no VAT like Trotters' Independent Traders.

    Firstly, when the goods are sold on credit terms, you make the following entry:

    DR Trade receivables control account
    CR Sales

    Secondly, when the payment comes through you do the following

    DR Bank (with receipt)
    CR Trade receivables control account.

    That's asuming the debtor pays up on time. If the debtor didn't pay up and you knew there was no chance that he'd ever do so, you'd have to write off the debt, in which case the double entry would be:

    DR Bad debts written off
    CR Trade receivables control account

    Reading this thread, I am getting the impression that this overstatement arose because of an elementary misunderstanding over the accounting treatment of credit sales and cash sales, which is AAT Foundation level stuff. But as you say, even a big firm can make such an error ; being big does not mean being super-human, after all.

    This example shows why there will always be a need for the auditing profession. People, even those employed by "big" firms, make elementary mistakes now and then. In addition, there will always be a perverse incentive on businesses to paint the rosiet picture possible of their financial performance and position, particularly in the difficult times that we face these days. The role that auditors play in ensuring that the vital concepts of relevance,reliability, comparability and understandability are not thrown of of the window in pursuance of "painting up the good news" has frankly never been more important. By the way, I don't work for an auditing firm!

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