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You might read the title to this article and wonder what it is about? Well, to set the scene, the year-end for your business is fast approaching, you regularly look at your profit and loss, balance sheet, debtors and creditors on XERO, QBO or SAGE, but realise that there are things that haven’t been taken into account as part of the regular processing of sales/purchase invoices and bank receipts/payments.
For example, there are a few customers who have gone into liquidation and won’t be paying or a batch of stock that is very slow moving which you may have to discount to shift. These are both what accountants would refer to as “year end provisions” and these should be considered before you finalise your annual accounts.
The reasons for doing this are:
• To make sure you have an accurate and realistic picture of the profitability of your business.
• To start your new year with a clean sheet, so that problems from the past do not reflect on current trading figures.
• To take advantage of tax relief that is available for such items, thus reducing your tax bill which may help cashflow.
There are many types of year-end provision that can be considered. I have set out in more detail below the two most common ones and explain the impact they will have on your figures:
BAD DEBTS
You should regularly review your customer ledger and write off invoices that you know won’t be paid. If you operate on the invoice basis for VAT and a balance has been outstanding for 6 months, you should adjust for this and reclaim the VAT that will have been paid over in the quarter in which the invoice was originally raised. If the customer subsequently pays the invoice, just raise a new invoice and account for the VAT again, or recognise the bank receipt as a sale and adjust for the VAT.
The above should be undertaken regularly, but at your year-end you should critically review your debtors list and identify slow payers or customers that you have concerns over. You can make a provision for doubtful debts at your year-end, which has the effect of reducing the debtor balance on your balance sheet and reducing your profit.
Any such provisions should be specific rather than a general round sum amount and should not include VAT as this will be recovered in the event of non-payment.
STOCK
Depending on your business, you may have a large amount of money tied up in stock. It is important at your year-end to undertake a physical stock count and make sure your stock control system accurately reflects the stock you hold. Any differences identified should be investigated and corrected and consideration should be given to the valuation of all stock lines to ensure stock is valued at the lower of cost or selling price.
So if you have damaged or slow-moving stock, reduce its value to whatever you think you might be able to get for it. This will result in a reduction to your overall stock valuation which will reduce the stock figure on your balance sheet and reduce profits.
As you can see from the above, considering year-end provisions is an important part of preparing your annual accounts and can result in reducing profits. There are other provisions that can be considered depending on the type of business you run. If this is something you would like to find out more about, please contact us.