Monthly management information is critical for your day to day decision making and business growth. Unlike year end financial statements your management information is not subject to any legal or regulatory reporting requirements so it is important that your accountant is taking all reasonable steps to provide you with an accurate set of monthly management accounts. Here are 5 crucial month end adjustments you should check your accountant is making:
Accruals and Prepayments
Accruals and prepayments are an accounting adjustment which improve the accuracy of management accounts. The accruals journal entry brings in costs which have been incurred but you have not yet been invoiced for. So make sure your accountant is aware of costs that may not have been billed to avoid overstating your monthly profit and avoid any nasty surprises of additional costs at a later date.
Prepayments, conversely, defer costs for your current financial period to a later one. So, for example, if you have been invoiced for two months worth of IT support in the month of management accounts that you are reviewing, then you can defer one month of the IT support to the following month. The effect of prepayments is to increase your profits and give you a true idea of your monthly overheads.
Staff and business owners can be slow to send over their cash expenses. Check that your team have submitted all expense claims and that your accountant has included all cash expenses. If you are reviewing and making decisions using your profit and loss account you need to understand how much profit you have made.
Depreciation and Amortisation
Depreciation and amortisation are book adjustments that reflect the use of fixed assets such as computers, office furniture or trademarks. A charge for should be made each month for depreciation or amortisation which reduces your profits. Make sure your accountant is making this adjustment each month to give you as accurate a picture of yours financials as possible. Not only will it avoid you looking at an inflated profit figure, but also reduce time spent by your year end accountants and save you money.
Corporation tax can be easily overlooked but you must pay it on all your profits. Check that your accountant is making a provision for corporation tax payable on your profits each month to avoid a shock at year end. Your accountant may not be a tax expert but a reasonable estimate can be made, for example a flat 20% of net profits each month or you can ask your tax accountant to help you find a reasonable way to make an estimate each month for budgeting purposes. You may even want to go one step further and put this amount away each month in a deposit account to ‘save up’ for this tax bill.
Capitalising Fixed Assets
It is surprisingly common for items which can be treated as fixed assets to be written off to the profit and loss account. Capitalising fixed assets moves the cost of an item to the balance sheet and so increases profit. A review of your fixed asset register with your accountant is a one way to ensure correct treatment of costs in your accounts.[maxbutton id=”1″ ]