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This is not so much a study question however i am looking to see if there is a particular standard i should refer to to be sure, feedback would be appreciated.
I have been working with someone who worked with an accountant for ever. The accountant left.
I couldnt work out what was going on in the accounts and then it hit me. Most of the expenditure is being coded to the balance sheet (in accruals) and a journal is then posted to move it as and when it fitted with the months revenue.
I have always know that operational expenditure be posted to the SOP&L and only accrue or pre-pay if the invoice goes over several months.
This has never been raised in an audit.
I am not saying its wrong i am just saying i have never seen it and i am slightly confused! Anyone know if there is anything in a standard which might explain the two methods?
It does sound odd.
I’d not expect to have a wide range of B/S accounts compared to P&L so this way you’d lose the detail of what types of expense had been incurred.
The key thing is whether they’re manipulating the profit, ie only releasing expense when there is sufficient revenue to generate a target profit.
On the other hand, if the accrued cost could be linked to on hand inventory and is only released when that inventory is sold, it would be ok.
The matching concept was abandoned ages ago. From my years of auditing experience, I have seen clients post the expenses to balance sheet and the accrual to a payable and once paid, the payable is derecognised. The only instances where expenses are coded to the prepayments account have been just that, where prepayments are being recognised (for example insurance premiums).
The entry sounds strange, but without knowing the full facts, cannot make a determination as to whether it is indeed a strange occurrence. In short though, it may be totally acceptable, but it all depends on the actual circumstances of your entity.