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I am facing with a challenge especially in the month ends that for some jobs which were started in the prior month by paying the initial costs may last for a week or two which will end in the new month. So in the new month also costs may incur under different heads. But when it is invoiced the invoice date would be the date when the first expense is incurred which fetched all the revenues to the prior month. But the expenses will be posted in the month of occurrence only. SO there is a huge difference in income and expense in many heads of expenses and incomes. Is there a way to resolve it.
I promised to answer on Saturday, I got a little busy, and keeping with my promise, albeit late; the answer is this in terms of IAS18, revenue recognition.
I am going to give the recognition criteria; and there is also a method called % of completion method - which would be more applicable to year end accuracy of income and expenses.
Sale of Goods, IAS18 (AC111).14 to .19)
Requirement for reliable measurement ...... the amount of revenue must be capable of being measured with reliability. Furthermore the expense relating to the transaction incurred to to still be incurred must also be measured reliability.l
Thus revenue already received is recognised as liability (revenue received in advance) until the related expense can be measured reliably. In other words, expenses actually incurred and measured by relation to supplier invoice or services job card.
Revenue and expenses relating to same transaction must be recognised simultaneously = Matching Principle, therefore the revenue CAN'T be recognised before the relevant expense are recognised; "recognition criteria of Renvue".
Hi Sunish
I have not completely understood the issue, but i will give my suggestion based on what i Understood
If i understand correctly, your invoice to clients is on the date the first expense is incurred. I would suggest that while invoicing the clients, if the job is not completed as on invoice date, you credit "Unearned Revenue" and then in the next month when all the costs are incurred and job is complete, you debit unearned revenue and credit revenue.
This would not only satisfy the matching cost and revenue concept but also be helpful for reporting purposes; because at the end of the month, you will come to know from your books of accounts which jobs are outstanding.
Similarly, for expenses, as waleed suggested, all expenses at the end of the month can be debited to prepaid expenses. Or an alternative could be, that you prepare excel sheet for each job and mention the expenses and the date on which they were incurred
Hopefully this helps
I think You should treat the expense as a prepaid expense and and the month end, the portion related to current month should be treated as an expense occurred in this month and the rest in next month/months
This situation takes two accounting concepts into account, which are matching and accrual concepts.
When a company receives an invoice before the expense is incurred, the expense is recognized as a prepaid expense on the current asset section of the balance sheet. If at the end of the month this expense is not fully incurred the portion incurred is charged on the income statement as an expense for the month and the portion not incurred remains as a current asset on the balance sheet.
For example, If say our real estate company( Morgan Estate) sends us our rental invoice of $500 at the month at the beginning of the month.
Dr Prepaid expense $500
Cr Morgan Estate $500
At Month end,
Dr Rental Expense(Attributable to the month) $250
Cr Prepaid Expense $250
When Payment is made,
Dr Morgan Estate $250
Cr Cash/Bank $250
Financial Statement for that Month
Balance Sheet
Current Asset - Prepaid Expense $250
- Cash ($250)
Equity - Retained Loss ($250)
Account Payable (Morgan Estate) $250
Income Statement
Revenue $0
Rental Expense $250
Loss ($250)
