Insurance invoice not paid

[Standby]

Hello,
Company received invoice for professional indemnity insurance. First payment for this invoice will be next month.
How journal entry should looks like? I assume that I can't enter full amount of this invoice.


Thank you in advance!

 

[MyAccountantOnline]

Hello,
Company received invoice for professional indemnity insurance. First payment for this invoice will be next month.
How journal entry should looks like? I assume that I can't enter full amount of this invoice.


Thank you in advance!

Yes you enter the full amount of the invoice, then when you make the monthly payments you record them as part payments. You wouldn't generally do this as a journal - what software are you using?

When your accountant prepares the year end accounts they will (should) adjust for any prepayment so that the accounts only include the proportion of the insurance premium which relates to the accounting period.

It's helpful (for your accountant) to record the period covered by the insurance in your accounitng records - it'll help them calculate the prepayment.

 

[Standby]

Yes you enter the full amount of the invoice, then when you make the monthly payments you record them as part payments. You wouldn't generally do this as a journal - what software are you using?

When your accountant prepares the year end accounts they will (should) adjust for any prepayment so that the accounts only include the proportion of the insurance premium which relates to the accounting period.

It's helpful (for your accountant) to record the period covered by the insurance in your accounitng records - it'll help them calculate the prepayment.

Invoice was issued on October, then was also end of year. First payment for insurance was in Novmeber, so all invoice should be count as prepayment?

 

[MyAccountantOnline]

Invoice was issued on October, then was also end of year. First payment for insurance was in Novmeber, so all invoice should be count as prepayment?

It'll depend on the exact dates but if for example your year end is 31 October and the insurance invoice was issued on 31 October 2024 for insurance for the period 1 November 2024 to 31 October 2025 then the entire charge will be a prepayment.

 

[Standby]

It'll depend on the exact dates but if for example your year end is 31 October and the insurance invoice was issued on 31 October 2024 for insurance for the period 1 November 2024 to 31 October 2025 then the entire charge will be a prepayment.

It's exactly as you wrote how shoulbe be entered invoice in this case?

 

[MyAccountantOnline]

It's exactly as you wrote how shoulbe be entered invoice in this case?

You should enter it as a purchase invoice dated 31/10/24 and include the details of the period its for in the description.

I may be able to be a bit more specific if you let me know what software you use for the company bookkeeping.

 

[Standby]

You should enter it as a purchase invoice dated 31/10/24 and include the details of the period its for in the description.

I may be able to be a bit more specific if you let me know what software you use for the company bookkeeping.

VT Transaction

 

[MyAccountantOnline]

VT Transaction

That's one I use - to enter the invoice select the option PIN and enter all of the details from the invoice.

When you make the monthly payments choose Suppliers from the Analysis ledger and then select the account name which you set up for the insurance so that the payment reduces the amount owing.

 

[Standby]

That's one I use - to enter the invoice select the option PIN and enter all of the details from the invoice.

When you make the monthly payments choose Suppliers from the Analysis ledger and then select the account name which you set up for the insurance so that the payment reduces the amount owing.

Yes, but If I enter all details (which is issue date is 31/10/2024) then the expenses will be include previous year.

 

[MyAccountantOnline]

If you want to add the prepayment (so that the charge is effectively moved to the correct year) you add a journal - debit prepayments and credit insurance with the total amount. VT have some guidance here - https://www.vtsoftware.co.uk/transplushelp/journals.html

 

[MyAccountantOnline]

I'd use a reversing journal - it'll save adding a journal in the next year to allocate the prepayment

Reversing Journals

A reversing journal is identical to an ordinary journal except that it also contains a reversal set of entries. The reversal date is normally the first day of the next...

www.vtsoftware.co.uk

 

[Standby]

If you want to add the prepayment you add a journal - debit prepayments and credit insurance with the total amount. VT have some guidance here - https://www.vtsoftware.co.uk/transplushelp/journals.html

Ok, thank you. That really helps! How later 'remove' prepayments?

 

[Standby]

Ok, thank you. That really helps! How later 'remove' prepayments?

Ok, now I can see that there is no prepayment in next year Thank you my guru!

 

[eteb3]

I’ve followed all this and am wondering (being more or less completely new to accruals accounting):

Is it justifiable for annual expenses like this to not assign the prepayments, but simply book each invoice in the year it’s received, whether the billing year is the name as the financial year or not?

Over the years it’ll all come out in the wash? Or not?

 

[numbersrule]

I’ve followed all this and am wondering (being more or less completely new to accruals accounting):

Is it justifiable for annual expenses like this to not assign the prepayments, but simply book each invoice in the year it’s received, whether the billing year is the name as the financial year or not?

Over the years it’ll all come out in the wash? Or not?

I know what you mean by come out in the wash, however, the reason it is done as above is because insurance is often paid in instalments, sometimes with interest, so the initial invoice is a 'liability like a loan or creditor.

In the example above there is in fact no liability in the earlier year because the prepayment entry balances it off because the period of insurance is all in the following year.

But that is not always the case.

If you allow it all to 'come out in the wash over time' you would not be recording your Assets and Liabilities correctly at specific points in time.

Another way of looking at it is that if there are always transactions like this then at what point will it all finally come out in the wash? When the Company closes?

 

[MyAccountantOnline]

....

Is it justifiable for annual expenses like this to not assign the prepayments, but simply book each invoice in the year it’s received, whether the billing year is the name as the financial year or not?

....

Yes if you trade as a sole trader or partnership - it's the default method of accounting unless you choose to use the accrual basis or turnover is more than £150,000 a year.