Insurance payment installments against one invoice

Accounting
1

Struggled to come up with a good title…! Sorry.

I have purchased a business insurance policy which will run for one year. The agent has sent me a monthly payment schedule which will operate by direct debit. If at any point I decide to cancel the cover, the direct debits will effectively stop. In other words, for six months on cover I will owe only half the annual premium.

So what I’ve done is to create a Purchase for the whole premium (let’s say that’s £120) and uploaded the invoice. In the first month a direct debit of £10 hit my bank account and I duly showed a £10 part payment against that purchase. In the second month a second £10 direct debit; a second part payment of £10 on the same purchase. So far so good.

My problem is that when I look at my Balance Sheet (the Creditor’s Control Account), I see a liability for the remaining 10 months; £100 (£120 minus 2 x £10 payments). I think this is wrong as I don’t technically “owe” this money; I can get out of the policy at any time and pay no more than I already have.

I don’t want to create 12 invoices (one for each month as I go along) so how can I better handle this situation?

Thanks in anticipation…

2

Hi @Director

Some users do find it easier to create the individual invoices on a monthly basis as this would then keep the figures accurately on your account, and even set it up as a recurring purchase to save creating them manually each month.

I’m not an accountant, so I’m not able to advise on the correct way of dealing with this. We do however have other users (including accountants) on the forums who may be able to assist.

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Thanks Matthew - not an ideal solution but I agree it would keep the figures accurate.

Any other views (how about you Accountants out there!)?

4

Hi,

I would agree with Mathew and say that recurring purchases would be the accurate way to show it.

Kind regards,
Chris

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5

Thanks all for the advice!

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6

The basic accounting premise is that your accounts should reflect a True and Fair view of your business. This FRC document explains what that means in 4 pages of dense text: https://www.frc.org.uk/FRC-Documents/Accounting-and-Reporting/True-and-Fair-June-2014.pdf

So in your situation, it’s straightforward. You are only consuming (to use accountant jargon) the insurance on a monthly basis. There is no obligation to pay all 12 months. So at any one time, your balance sheet should not reflect the remaining months insurance costs - since they are not, and will never be a liability of the business.

Make sense?

Of course, what you do with the £120 invoice is another matter. That’s why most people pop it straight into the system, and part pay it over 12 months. Then when the accounts are prepared at year end or for tax purposes, manually remove what remains of the phantom liability from the balance sheet - and profit and loss if that’s where the other side of the transaction was originally placed.

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7

Thank You! Pretty much what I thought but just wanted to check. I’ve now created a recurring purchase so that the balance sheet is showing the True and Fair reality I was after.

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