Hello

I work for a manufacturing company and we have recently gone through our year end routine (December). The auditors are now on site and checking through our year end accounts.

One of our customers who does not have a credit account with us has to pay on proforma invoice prior to us begining our manufacturing work for them. We issued the profoma invoice in Oct 09 for example £20,000. We completed half of the work and raised tax invoices for £10,000 and despatched prior to our year end.

This has now left £10,000 as a credit entry amongst our sales ledger control account (entry was Dr Bank CR Sales Ledger) at year end. We also have for example £5,000 of stock sitting on the balance sheet which will be used to complete this order but on which no work has been started yet apart from the purchase of raw materials.

The audior informed me this should be classed as deferred income but unfortunatly I have next to no knowledge of this subject and would like another opinion. Also is there an IFRS that defines deferred income and how it should be treated ?

Many thanks

James

Hi James,

Yes I would agree with your auditors that the £10,000 should be treated as deferred income because essentially at your year end you owed your customer £10,000 worth of manufacturing so by debiting debtors and then crediting deferred income under current liabilities, this will represent your company’s liability to the customer.  All the auditor is doing is simply re-classifying the £10k because strictly speaking you should not offset assets and liabilities which you are doing by leaving £10k sat on the customer’s ledger account which would suppress the true value of your debtors and overall reported current assets.  Conversely your current liabilities will also be understated.

Kind regards
Steve

Steve

Hi Steve

Thanks for the great explanation

James