1. Bills payable

Any invoices received from your suppliers and recorded in your accounts will show as a cost in 2021 if the bill is dated on or before 31 December 2021. It doesn’t matter when you pay the bill. If you pay the bill in January 2022, February 2022 or later, it will still show as a cost in 2021 because of the date of the supplier’s invoice.

This means it will reduce your profit but not your cash.

2. Debtors receivable

This is similar to bills payable. Let’s say that you send out invoices to your clients in December 2021 but they don’t pay you until January 2022. This will be income in your accounts in 2021 because that’s the date on the invoice. It doesn’t matter that you don’t have the cash yet.

This means that it will increase your profit but not your cash.

3. Income in advance

You might also hear this called deferred income.

Let’s imagine that your business runs courses, you have a new course starting in January 2022 and people have been booking and paying in November and December 2021 to get their place on the course. This will be money in your bank account. But the income doesn’t belong to 2021. You will earn that income in 2022 when you run the course.

The principle at play here is all about trying to match income to the right time period it relates to.

This can mean that profit will decrease but not your cash.

4. Accrued income

This is similar to income in advance, but it is the other way around.

If you invoice your clients in arrears then you may have done work in 2021 but have not invoiced your client until January 2022. If that is that case then you and your accountant may accrue for the income in 2021, even though you haven’t invoiced for it or been paid for it yet.
It’s the principle of trying to match income to the time period is relates to again.

This scenario is common when grants are promised but not yet received, our not for profit clients see this happening. They may receive a grant offer pre year end but not receive the cash until 2022. Income recognition for charities follows particular rules but in many cases it would be right to include the income in 2021 even though they don’t get the cash until 2022.

This can mean that profit will increase but not your cash.

5. Prepayments

We’re still on the matching principle here. Typical examples will be things like insurance or subscriptions which you pay for in advance. If you pay for your company’s annual insurance in advance in July 2021 and it covers July 2021 – June 2022 then only 6 months worth of that cost really belong to 2021. The other 6 months are a prepayment towards 2022.

So you have paid the full bill and your cash has gone down, but it’s not all a cost this year.

This adjustment will increase your profit but not your cash.

6. Accruals

Accruals are the opposite of prepayments.

Imagine that you ran an event in December 2021. You will have costs of venue hire, catering and entertainment and others. These costs clearly belong in 2021, you received the benefit of these services in 2021. But if your suppliers don’t invoice you until January 2022 then probably you won’t pay for the services until February 2022.

A year end adjustment would be to accrue for the cost of these services so that the cost moves into December 2021 even though the supplier bills are received in January 2022 and you pay in February 2022.

This adjustment will decrease your profit but not your cash.

7. Tax

The final example here is tax.

Assuming you are running a profitable VAT registered business then you will be paying VAT on your purchases which you can reclaim and you will be charging VAT when you invoice your customers which you have to pay over to HMRC. So some of the money sitting in your bank account really belongs to HMRC.

Assuming that your business is profitable then you will be paying corporation tax. Tax is another cost. The year end accounts will include tax, but as at 31 December 2021 you won’t have paid this tax yet, so the money should still be in your bank account.

This means your profit after tax will reduce by the value of the tax charge for the year, but by 31 December your cash won’t have reduced.

Sometimes people get a nasty surprise here when they realize that they haven’t got enough cash in their account to pay the corporation tax bill. If this is you then a practical solution in future can be to open a separate bank account and to move money into it at regular intervals during the year. It makes sense to do this monthly or quarterly in line with the frequency at which you review your reports. Then by the time you get to your year end you should have the cash safely put away ready to pay your corporation tax bill.