[number_cruncher_24]

Hi – I was wondering if someone could help me with an accounting question – here’s the scenario: Our fiscal year ends on May 31. We received a bill for our insurance policy on May 20. The bill is for insurance for the period of 6/15 through 12/15. We enter all bills into the system when received. When I enter this bill into the system, it will result in a credit to A/P but which account should be debited? It’s not an expense for the current fiscal year because it is for a future period, but we won’t pay it until after 5/31, so it’s not a prepaid yet either.

[mla1169]

LMAO. No, the auditor does not send out confirmations based on the clients books that's kind of the point..wink, wink. An audior absolutely can send a confirmation to a vendor with no balance on the clients books.

And again, payables and receivables do not have a direct relationship to revenue and expenses. Yes it would be a deferred revenue AND a receivable on the vendors and, and a prepaid expense AND a payable on the customers end.

FAR- 77
AUD -49, 71, 84
REG -56,75!
BEC -75

Massachusetts CPA (non reporting) since 3/12.

[mla1169]

LMAO. No, the auditor does not send out confirmations based on the clients books that's kind of the point..wink, wink. An audior absolutely can send a confirmation to a vendor with no balance on the clients books.

And again, payables and receivables do not have a direct relationship to revenue and expenses. Yes it would be a deferred revenue AND a receivable on the vendors and, and a prepaid expense AND a payable on the customers end.

FAR- 77
AUD -49, 71, 84
REG -56,75!
BEC -75

Massachusetts CPA (non reporting) since 3/12.

[Mayo]

It's a gray area and you can defend either one to an auditor. It depends on the nature of the invoice:

Scenario #1: We received the invoice for a renewal of policy, but we had not decided to renew at year end, and were shopping around for different vendors with better rates.

As we still have coverage through end of our fiscal year, this wasn't a priority and we didn't book anything as no transaction occurred.

Scenario #2: We made the decision to go ahead and renew this policy, and communicated that to our insurance company. So we booked a payable and a prepaid asset. If you need, I can send you emails showing the approval, and support showing it was eventually paid.

Scenario #2 starts to matter only if the policy was never paid. Since the policy begins in 6/15, the insurance company would either have to receive cash payment, or extend credit by 6/15 for the purchase of the policy. Shouldn't be hard to wait around for that.

It gets dicey if the policy is for a period past normal operations and was never paid for.

Mayo, BBA, Macc

[Mayo]

It's a gray area and you can defend either one to an auditor. It depends on the nature of the invoice:

Scenario #1: We received the invoice for a renewal of policy, but we had not decided to renew at year end, and were shopping around for different vendors with better rates.

As we still have coverage through end of our fiscal year, this wasn't a priority and we didn't book anything as no transaction occurred.

Scenario #2: We made the decision to go ahead and renew this policy, and communicated that to our insurance company. So we booked a payable and a prepaid asset. If you need, I can send you emails showing the approval, and support showing it was eventually paid.

Scenario #2 starts to matter only if the policy was never paid. Since the policy begins in 6/15, the insurance company would either have to receive cash payment, or extend credit by 6/15 for the purchase of the policy. Shouldn't be hard to wait around for that.

It gets dicey if the policy is for a period past normal operations and was never paid for.

Mayo, BBA, Macc

[acamp]

I've never like this transaction from either perspective and I've seen it done both ways.

Book prepaid and liability: grosses up both sides, which seems kinda dirty (you now created an asset out of thin air); but if you don't book anything you're possibility understating your liabilities (maybe more suited if contractually obligated). Should a liability related to the following year for services not yet rendered be included in current year's financials?

Looking at it from another perspective, say during FY14 contracts were signed on a large debt financing deal to be completed FY15, I could see there being a disclosure, but no way a receivable and liability are going to be booked for FY14.

Ninja + Wiley Test Bank: [FAR - 81] [REG - 76] [BEC - 88] [AUD - 73](doh!)

Becker Videos: [AUD - 82]

California CPA

[acamp]

I've never like this transaction from either perspective and I've seen it done both ways.

Book prepaid and liability: grosses up both sides, which seems kinda dirty (you now created an asset out of thin air); but if you don't book anything you're possibility understating your liabilities (maybe more suited if contractually obligated). Should a liability related to the following year for services not yet rendered be included in current year's financials?

Looking at it from another perspective, say during FY14 contracts were signed on a large debt financing deal to be completed FY15, I could see there being a disclosure, but no way a receivable and liability are going to be booked for FY14.

Ninja + Wiley Test Bank: [FAR - 81] [REG - 76] [BEC - 88] [AUD - 73](doh!)

Becker Videos: [AUD - 82]

California CPA

[Not a Quitter]

Thanks acamp and Mayo! Makes me realize I'm not totally losing my mind. I guess insurance is a little different because you aren't going to get coverage unless you pay, but other goods and services should not be recorded as liabilities until received. I can see this situation both ways now.

FAR- 85 I'm DONE!
BEC- 75
REG- 60,60,75
AUD- 74,74,83

CPAExcel used for BEC, AUD, REG
Exam Matrix used for FAR plus NINJA Blitz, cpareviewforfree and a little CPAExcel

[Not a Quitter]

Thanks acamp and Mayo! Makes me realize I'm not totally losing my mind. I guess insurance is a little different because you aren't going to get coverage unless you pay, but other goods and services should not be recorded as liabilities until received. I can see this situation both ways now.

FAR- 85 I'm DONE!
BEC- 75
REG- 60,60,75
AUD- 74,74,83

CPAExcel used for BEC, AUD, REG
Exam Matrix used for FAR plus NINJA Blitz, cpareviewforfree and a little CPAExcel

[HerdCPA]

I can't believe this thread. If no cash/asset has been paid, there is no prepaid asset. Period. If you have not received a service or product at year-end, there is no liability since the contract can be cancelled and no payment wold be required. Period. There is no entry required in this situation. If an entry is made before year-end, it must be reversed in the closing entries otherwise the assets and liabilities would be overstated. Also I can believe some of the comments on here by mla. You are talking down to people and asking if they have even taken the audit test. That means nothing. I work as an auditor and I have taken audit btw if that helps you any. And in reference to your comment about the confirmations, you would send out a confirmation with the client's balance. Even if the insurance company sent the confirmation back and said a balance was owed, you would obtain the invoice and see the period of the contract does not begin until after the end of the fiscal year. Therefore it is not a liability on the balance sheet as of May 31st.

[HerdCPA]

I can't believe this thread. If no cash/asset has been paid, there is no prepaid asset. Period. If you have not received a service or product at year-end, there is no liability since the contract can be cancelled and no payment wold be required. Period. There is no entry required in this situation. If an entry is made before year-end, it must be reversed in the closing entries otherwise the assets and liabilities would be overstated. Also I can believe some of the comments on here by mla. You are talking down to people and asking if they have even taken the audit test. That means nothing. I work as an auditor and I have taken audit btw if that helps you any. And in reference to your comment about the confirmations, you would send out a confirmation with the client's balance. Even if the insurance company sent the confirmation back and said a balance was owed, you would obtain the invoice and see the period of the contract does not begin until after the end of the fiscal year. Therefore it is not a liability on the balance sheet as of May 31st.

[mla1169]

Herd thanks for creating an entirely new user just to post your input. Asking someone if they took aud is hardly talking down to them, but I can smell a troll from several hundred miles away.

FAR- 77
AUD -49, 71, 84
REG -56,75!
BEC -75

Massachusetts CPA (non reporting) since 3/12.

[mla1169]

Herd thanks for creating an entirely new user just to post your input. Asking someone if they took aud is hardly talking down to them, but I can smell a troll from several hundred miles away.

FAR- 77
AUD -49, 71, 84
REG -56,75!
BEC -75

Massachusetts CPA (non reporting) since 3/12.

[HerdCPA]

I did not even have an account before I ran across this thread. I was so disturbed by the spreading of false information that I felt the need to create an account to ensure someone does not take the incorrect advice to heart. I got the following quote from “Accounting Coach” (a great website that you can use to start research on accounting entries and topics) “A company's commitments (such as signing a contract to obtain future services or to purchase goods) may be legally binding, but they are not considered a liability on the balance sheet until some services or goods have been received. Commitments (if significant in amount) should be disclosed in the notes to the balance sheet.” The link is… https://www.accountingcoach.com/balance-sheet/explanation/2

Please read it and consider not standing so steadfast in your belief that you are correct. I am not trying to be a “troll” as I have better things to do. Please do some independent research and I beg that the original poster not use mla's suggestion at work since it will be incorrect.

Also, your comment about taking audit in conjunction with your comments about whether he/she even understands what a confirmation was led me to believe that you were talking down to a fellow poster.

[HerdCPA]

I did not even have an account before I ran across this thread. I was so disturbed by the spreading of false information that I felt the need to create an account to ensure someone does not take the incorrect advice to heart. I got the following quote from “Accounting Coach” (a great website that you can use to start research on accounting entries and topics) “A company's commitments (such as signing a contract to obtain future services or to purchase goods) may be legally binding, but they are not considered a liability on the balance sheet until some services or goods have been received. Commitments (if significant in amount) should be disclosed in the notes to the balance sheet.” The link is… https://www.accountingcoach.com/balance-sheet/explanation/2

Please read it and consider not standing so steadfast in your belief that you are correct. I am not trying to be a “troll” as I have better things to do. Please do some independent research and I beg that the original poster not use mla's suggestion at work since it will be incorrect.

Also, your comment about taking audit in conjunction with your comments about whether he/she even understands what a confirmation was led me to believe that you were talking down to a fellow poster.

[mla1169]

What that quote actually means is signing a contract in itself is not enough to book a liability. An invoice from a vendor is enough to book a payable. Always.

So sorry but I've been an accountant since 1996.

FAR- 77
AUD -49, 71, 84
REG -56,75!
BEC -75

Massachusetts CPA (non reporting) since 3/12.

[Author]

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