Sometimes it is difficult to know how to account for transaction invoices that have been issued and not paid by the end of the financial year, either to your organisation or from your suppliers.
Your accounts are not based on the money that was actually paid or received in the financial year, they are based on what should have been paid or received.
The following definitions may help you as you prepare your accounts for the Independent Examiner.
Debtors – A debtor is one party who owes money to another – for example, clients or customers who have not yet paid in full for any goods or services that your organisation has already supplied to them, are debtors to your organisation.
If this debt occurs before the end of one financial year, but is then paid in the next financial year, it should be included in first financial year’s accounts and recorded as a debt.
Creditors – A creditor is one party who is owed money by another – for example, suppliers who have provided your organisation with any goods or services that have not yet been paid for in full are creditors of your organisation.
Prepayments – A prepayment is when you pay an invoice or make a payment for more than one period in advance. For example, you may pay for your rent for three months in advance but want to show this as a monthly expense on your profit and loss. Prepayments are a type of debtor.
Accruals – An accrual is when you pay for something in arrears. For example, you may receive an invoice for your electricity at the end of a quarter but want to record the payments before this. An accrual is usually based on an estimate. Therefore, when the invoice is received, you may need to make an adjustment to the final amount. An accrual is a type of creditor, money that you owe.