Deferring Income – Why Bother?

If you’re an experienced accountant, you’ll already understand why adjustments are made for deferred income, accruals and prepayments. For those new to accounting, however, the terminology can often seem confusing.

At the heart of these adjustments is the accruals basis of accounting. Rather than recognising income and expenses when cash changes hands, businesses recognise them when income is earned and costs are incurred. This helps ensure the financial statements present a fair and accurate picture of the business’s performance during a particular period.

To keep things simple, we’ll avoid technical accounting standards and instead look at a couple of practical examples.

Creating accruals, deferring income and recognising prepayments is not simply about spreading values evenly across months in the profit and loss account. The objective is to ensure income and the costs associated with generating that income are recognised in the same accounting period.

Consider a seasonal business such as a holiday park. Most of its revenue may be generated during the summer months, while there may be periods during the winter when little or no trading activity takes place. That’s perfectly normal.

However, the business may receive deposits, or even full payment, months before customers arrive. A booking made in January for a holiday taking place in July creates cash for the business, but it does not immediately create revenue. The service has not yet been delivered, and the business still has an obligation to provide the holiday.

Another common example is a subscription-based product or service where customers pay annually or quarterly in advance, but receive the service over a much longer period. This means the business receives cash upfront for the full subscription period, even though the service will be delivered over several months.

Although payment is received upfront, the income relates to future periods and should therefore be recognised gradually as the service is provided. Each month, a portion of the deferred income is recognised in the profit and loss account as the business fulfils its obligation to provide the service. This ensures that income is recognised in the same period as the costs incurred to deliver that service.

From an accounting perspective, when payment is received before goods or services are provided, the amount is recorded as deferred income within liabilities on the balance sheet. As the goods or services are delivered, the liability reduces and the income is recognised in the profit and loss account.

This approach provides a more accurate picture of a business’s financial performance and helps ensure that profits are not overstated simply because cash has been received in advance of the work being carried out.

Operating and Finance Lease functionality in nettTracker

There are a few subtle differences between a finance and operating lease that can make quite a big difference in how they should be accounted for.

The biggest difference between the two lease types is that, with an operating lease, it’s the lessor that retains full control of the asset concerned.  However, whether you are following accounting standards FRS102, IFRS16, or ASC842, most leases (both operating and finance) need to be recognised as both a lease liability with a connected Right of Use Asset on the balance sheet.

Depending on the accounting standards followed, operating leases can be treated the same way as a finance lease when it comes to the accounting entries required.  In essence, this means the profit and loss reports interest and depreciation.  The Right of Use (ROU) Asset is depreciated on a straight-line basis, and interest charged for the lease, which will reduce as the lease liability reduces.

However, if we are strictly following the accounting requirements for an operating lease, the ‘Lease Expense’ needs to be reflected on a straight-line basis.  The lease expense is a combination of interest on the lease and the depreciation of the ROU asset, making the asset depreciation the difference between the straight-line lease cost and the reducing interest on the lease.

nettTracker can now fully account for both finance and operating leases, ensuring the correct values are calculated and the appropriate accounting entries made, regardless of the accounting standard you are adhering to.  If you select Operating Lease when creating your lease, the ROU asset that is also created will have a bespoke depreciation schedule that reflects the reducing interest charge over time.

Adding an existing item - what is the current asset value?

If you are introducing existing leases into nettTracker, it is quite possible that you won’t know the value of an asset being leased at the date point you need nettTracker to start calculating.  This is most common with operating leases, however, nettTracker now has some additional functionality to help calculate the Right of Use Asset Value and Lease liability. 

We now offer the option to use an effective borrowing rate instead of the asset valuation when entering the new lease.  The Effective Borrowing rate can be an estimated interest rate that a bank or lender may charge if a loan was required to cover the lease payments moving forward.

This short video explains the different settings and the impacts on your reports.

How do I get access to the Loans & Leases features?

Don’t forget that the loans/lease features are included within your nettTracker subscription at no additional cost on companies that have been upgraded to Version 2.  If your company hasn’t been upgraded yet and you want to get your hands on these new tools, please contact our support team. 

These recent updates are a result of customer feedback and support questions. We look forward to receiving more feedback to help us improve nettTracker further.

Accounting for Leases - FRS 102 and IFRS 16

Whether you're based in the UK or elsewhere in the world, accounting for leases has changed over the last few years.  Back in 2019, IFRS 16 was introduced, and from January 2026 UK accountants now have FRS 102 to contend with.

So what does that actually mean?
Basically, lease/rent costs that were historically treated as expenses against the profit and loss need to be accounted for differently.

Examples being:

• Lease of plant and machinery or other equipment

• Lease of land and buildings

• Lease of vehicles

ASC 842 (Accounting Standard Codification for US GAAP), treats operating and finance leases in different ways, but under IFRS 16 and FRS 102 leases can follow the 'Finance Lease' approach - that's where nettTracker can help.  (at no additional cost too)

The 'Lease' needs to be reflected as a liability within the balance sheet, and whatever is being leased is treated as a ROU (Right of Use) Asset.

The payments previously coded directly to the profit and loss, are now recorded against the lease liability - just like repaying a loan.  There are some complexities involved with calculating the lease and asset value, however, nettTracker can help make this process straight forward.

This new feature does not just provide tools for brand new leases.  If an existing lease has more than 12 months left to run in the current year, then the lease needs to be introduced into the accounts at 'present value' with adjustments required to restate retained earnings.

With the Lease and ROU Asset in place, nettTracker will automatically calculate and post accounting journals every month for interest payable on the lease, and depreciation against the asset.

We've created a detailed tutorial to explain exactly how leases and assets are created in nettTracker.  The tutorial includes:

• Creating a new lease in the current year

• Creating accruals for dilapidations

• Recording the 'Deposit' and holding within 'Prepayments'

• Creating a lease that is part way through the lease term

Please click on this link to view the tutorial.  It is quite a detailed subject so the video is quite long, but there are time stamps available so that you can skip to a section of interest.

The loans and leases features are available within the version 2 subscription with no additional costs payable.  We are currently in the process of converting all existing companies to version 2, but if you would like your company updated, please raise a support ticket and we will fast-track for you.

If you've created a trial in the past that may have expired, please contact us and we'll be happy to reinstate the trial so that you can try out all of the new features within version 2.

As always, please don't hesitate to raise a support question if you feel there is anything that we can help you with, and thank you for your continued support.

The nettTracker team

Accountants and FRS 102 Lease Accounting: Is Your Client Portfolio Ready for the changes from January 2026?

f you're managing clients reporting under FRS 102, there could be some uncomfortable conversations on the horizon. The changes to lease and revenue accounting that came into force on 1st January 2026 aren't just technical updates. They'll fundamentally alter your clients' financial statements and potentially trigger loan covenant breaches.

Here's the reality: most practice management and client accounting software isn't equipped to handle these changes efficiently. So here's what's coming and how to manage it across your entire client base.

The Lease Accounting Revolution

Operating leases living comfortably off-balance sheet? - That ends this year. From January 2026, virtually all your clients' leases (offices, vehicles, equipment) need to appear on the balance sheet as both a right-of-use asset and a liability.

What this means for your clients:

That fleet of vans showing up as a simple monthly expense in their P&L? It becomes a substantial asset and liability, calculated at the present value of all future lease payments. Every office lease currently treated as an operating expense becomes a right-of-use asset with a corresponding liability.

The conversations you'll need to have:

• Explaining why their EBITDA has suddenly increased (lease costs become depreciation and interest)

• Managing their concern about appearing more leveraged on paper

• Helping them understand shifting debt-to-equity ratios

• Supporting renegotiations with their banks when loan covenants are triggered

Yes, there are exemptions for short-term leases (under 12 months) and low-value assets. But walk through your client list. How many have property leases, vehicle fleets, or significant equipment? That's who you need to be speaking to.

The Practice Management Challenge

Here's the reality check: the software most practices use for client accounting wasn't built for these requirements. Multiply this across 50, 100, or 200 clients, and you're looking at a significant workload.

For lease accounting, you'll need to:

• Track and discount lease payments over time for each client

• Calculate right-of-use assets and lease liabilities

• Apply correct discount rates (the "obtainable borrowing rate")

• Manage lease modifications and reassessments

• Generate new disclosure requirements

What this means for your practice:

Standardised lease accounting. Automatically calculate present values, track right-of-use assets, manage lease liabilities, and generate required journal entries. Consistently, for every client. No manual spreadsheets, no reinventing the wheel for each engagement.

Revenue recognition made manageable. Track performance obligations, allocate transaction prices, and recognise revenue correctly. Whether your client has bundled services or variable consideration, apply the same robust process every time.

Scalability. Handle FRS 102 compliance for 10 clients or 1000 clients with the same level of efficiency and accuracy. Free up your team to focus on advisory work rather than compliance grunt work.

Client communication. Generate clear, compliant disclosures and explanatory notes that help your clients understand the changes (and justify your fees for the transition work).

We designed this for practices like yours. Intuitive for your team, powerful enough for complex scenarios, and built to handle volume without sacrificing quality.

Your Action Plan for 2026

Time is short. For clients with December year-ends, their first affected financial statements are for the year ending 31 December 2026. That's less than 11 months away.

Here's what we'd recommend:

1. Client segmentation. Identify which clients are significantly affected (lease-heavy businesses, complex revenue models) versus minimal impact.

2. Transition planning. Decide on a consistent approach: restate comparatives or cumulative catch-up? Different clients may need different strategies.

3. Software assessment. Can your current systems handle this efficiently at scale? Or are you looking at hundreds of hours of manual work?

4. Fee conversations. This is significant work. Plan your pricing strategy and client communications now.

5. Team training. Your staff need to understand these changes deeply to implement them consistently.

The January 2026 reality:

We're now in the transition year. Clients need their opening balance sheet positions calculated, transition decisions documented, and systems ready to track ongoing lease and revenue transactions under the new rules.

The Bottom Line for Your Practice

These changes are mandatory, complex, and will affect the majority of your FRS 102 clients. The firms that have the right systems and processes in place will handle this transition efficiently and profitably. Those still using spreadsheets and manual workarounds will watch their margins evaporate.

NettTracker v2 was released in January 2026 to help business and accounting firms with FRS 102 compliance. Because when you're responsible for dozens or hundreds of sets of accounts, efficiency isn't optional.

Want to see how NettTracker v2 can streamline FRS 102 compliance across your client portfolio? Book a demo https://calendly.com/nett-tracker/introduction-to-netttracker or learn more at https://www.nett-tracker.com/

ROU Assets - What are they?

Keeping this simple, ROU (Right-of-Use) assets could be cars, vans, equipment, land, or buildings that a business has regular use of but does not legally own. Instead, they are leased.

It’s possible that at the end of the lease there could be an additional balloon payment to purchase the asset, or that leases (particularly for buildings) may be renewed. However, we’ll put those options to one side for today.

Until recently, most items that were leased were simply recorded as expenses affecting the profit and loss account. Under FRS 102, from January 2026, that’s no longer the case. Most leases will now have to be recognised on the balance sheet as a liability, and the leased item becomes a Right-of-Use asset.

If we take a motor vehicle as an example, when purchased (either outright or by hire purchase), the asset is generally depreciated over its estimated useful life based on the original purchase cost, and the business owner has full control over the asset. The owner could sell the asset whenever they wish and settle any loans, if applicable.

When an asset is leased, the lessee only has the right to use the asset during the lease term — they do not have full ownership or control of it. The value of the Right-of-Use asset is not simply the total cost of all expected lease payments. Any deposits, legal fees, disbursements, commissions received, and payments that may be due at the end of the lease must also be considered.

As a result, calculating the initial value of the Right-of-Use asset and its associated lease liability is not as straightforward as it might first appear. Under FRS 102 and IFRS 16, where a finance-style lease model applies, the asset is then depreciated on a straight-line basis over the lease term.

The market value (fair value) of the asset is considered together with all amounts already paid or received, future lease payments, and the frequency of those payments (for example, monthly, quarterly, or annually). Payments are often made in advance, which affects cash flow and the calculation of the lease liability. An interest rate is then applied to discount the payments.

The present value of the lease and the asset is calculated using the fair value of the asset together with all associated costs and future payments. This helps determine the implicit rate in the lease, which effectively represents the return or profit the lessor expects to earn from leasing the asset to the lessee.

If, for example, a bank loan were required to purchase an asset or cover rent payments, a similar interest rate concept would apply over the loan term. However, if the implicit rate cannot be readily determined, the incremental borrowing rate can be used instead (a realistic interest rate based on current lending rates available to the business).

After calculating the asset and liability values, accounting journal entries are required to regularly update the balance sheet. These entries recognise the interest on the lease liability and depreciation of the Right-of-Use asset.

Using spreadsheets and creating journal entries for Right-of-Use assets can take up a significant amount of time, whether you are an accountant or bookkeeper in practice or working in industry.

nettTracker provides tools that help streamline month-end and year-end processes, including the creation of a Right-of-Use asset and lease liability in just a few minutes. Once set up, all required accounting journal entries are generated automatically when connected to Sage Business Cloud, Xero or QuickBooks Online.

To learn more about nettTracker, visit. www.nett-tracker.com You can trial for free - no card payment details required.

nettTracker - full version 2 Update

In 2025, we released a brand new user interface that was completely redesigned and rewritten to be  more user friendly.  However, there was no significant change to how processing was carried out behind the scenes, nor how we calculated depreciation or other adjustments.

Since that release, we have been working hard to rewrite the parts that you cannot see: bringing together all of the comments and feedback we have received since first releasing nettTracker, as well as our own observations, to create a fantastic new platform for managing your monthly accounting adjustments.

We appreciate that this has taken longer than expected and are grateful for your patience whilst we have worked to create this new platform, however, we are confident that it is going to be worth the wait.
 

So what can you expect from version 2?
We have made improvements to all aspects of nettTracker.  This includes fixed assets and prepayments, where we now calculate all adjustments for the lifespan of the item when it is created not just for a financial year, and also the brand new Loans feature which will be available for all users at no additional cost.  The new calculation processes will also make it possible for us to support larger asset registers.
 

Over the next month, we'll be sending out a weekly newsletter to explain the new features and improvements in more detail, but to get started, below is a summary of what you can expect:
 

Perpetual 'Year-End'
With this feature enabled, it will no longer be necessary to run the 'year-end process’, which is a current requirement.

Make adjustments to depreciation at any time
With the restriction of the 'year-end' removed, you will be able to make adjustments to depreciation in a previous financial year - nettTracker will recalculate future unposted depreciation as required.

Produce reports over any given date range
We have removed the restriction to only view the movements of the asset register or accruals/prepayments for a given financial year.  Instead simply enter the 'to' and 'from' dates.  If you just wish to view the movements for a single month or quarter, it will be easy to do.

View forecasts and projections beyond the current financial year
We have removed the restriction to only view the depreciation forecast for the current and previous financial years.  You'll be able to view the forecast for several years into the future, with the same ability for the prepayment/accrual projections.

Track 'Tax Depreciation'
In addition to the 'book' depreciation, which is the focus for accounting journal entries, you will have the option to monitor tax depreciation and the tax written down value of assets.

Report against disposals and deletions
We understand that sometimes it's easy to delete or dispose assets in error, but it's not so easy to quickly see when those actions would have occurred. A filtered report will now make it easy to check all deletions/disposals with options to reverse the action if necessary.

Create 'Prepayments' from 'Transactions'
In the same way that fixed assets can be created from a transaction coded to a specified 'mapped' account, a prepayment will be able to be created in very much the same way.  This will make the reconciliation of your prepayments much easier.
 

Monitor loans
Initially focusing on 'Hire Purchase’ loans with known interest charges and repayment terms, nettTracker will calculate the required interest charges and post all of the required monthly accounting journal entries.  The interest can be allocated on a straight line basis, or by the ’sum of digits’.

Leases and Right of Use Assets
To help comply with IFRS 16 and FRS 102, for leases with known payments and term, nettTracker will calculate the 'Implicit Rate', the 'Right Of Use' asset value, and in-turn, will calculate and post the required monthly accounting journal entries for interest charges against the lease, and depreciation against the 'Right of Use' asset.
 

When will all of these features be available to you?
The release date has been set to Thursday 29th January - this is less than a week after our co-founder's (Ash's) birthday, so we'll have two parties this month!
 

All of our updates are based on feedback from our users, and we hope you'll enjoy making use of the improvements we've made.  As always, if you have more ideas or feedback, please forward to us as we do note these and take everything into consideration.

This just leaves us to say 'Happy New Year' to you all, and thank you for your continued support.

The nettTracker team

nettTracker version 2 is now live

Version 2 of nettTracker has just been released, so you may find things look very different the next time you log-in.  A new suite of video tutorials have been created, and can be accessed from the 'Knowledgebase' found within the 'Help' menu.
 
To help you get familiar with some of the most used areas, links to three tutorials can be found below:

QUICK-START GUIDE:  This is a 13 minute tutorial that takes you through the basics when setting up a fixed asset register in nettTracker.

DASHBOARD and MENUS:  An 8 minute tutorial to help you get familiar with the new layout of the dashboard and menus.

ASSET REGISTER: Within this 6 minute tutorial, we walk you around the asset register, and the functionality found within.
 

The help menus within nettTracker have also been updated.  If for any reason these appear to be unresponsive, you may need to clear the 'cache' within your internet browser.

We hope you are happy with the improvements we've made so far, and we promise there's a lot more to come.  

nettTracker version 2 - progress and expected time lines

Good progress has been made in terms of the development of version 2 of nettTracker.  Over the coming months nettTracker updates will essentially be released over three phases.  Let's explain how that will work: 

Phase 1
A brand-new user interface, improvements and simplifications to settings and asset mappings, and slight modifications to the asset register.  (release expected mid-late December)

Phase 2
Full migration to version 2 will allow depreciation to be fully calculated on assets for the rest of their useful lives, enabling the depreciation forecast to be downloaded for the next three years.  A modification to the year-end process will make it much easier to make corrections after closing the year-end.  Depreciation adjustments will be able to made against assets at any time.  (release expected late January)

Phase 3
Supplier bills posted to 'Prepayments' will be able to be monitored via transactions in the same way that we do with fixed assets, allowing new prepayments to be created from the transactions area.   The loans feature will be in place initially for Hire Purchase loans, and other loan types to follow later.   (release expected late February / early March 2025)

When version 2 has been released, new video tutorials and webinars will be made available.  In the meantime, below is a taster of what is on the way so that you can see the improvements we have been working on. 
 

Version 2 demo

If you have any ideas or preferences for the kind of things that you would like to see on the 'dashboard' that would be useful to you, please let us know.  While we are spending a lot of time working on things 'under the hood', and with version2 'parked in the garage' now is really the perfect time to make as many changes and improvements as we can.
 

We do hope you find these updates helpful, and that you like the look of the improvements being made.  We are working really hard to make nettTracker best in class and helping you save time on fixed assets and other adjustments connected to your month-end close.

In the meantime, thank-you for your continued support.

The nettTracker team

nettTracker - Spring release 2024

Provider Tracking Options
We have had the ability to split accounting journals by 'Class' for QuickBooks users, but due to demand we are happy to announce that you can split journals for the following accounting providers as follows:

• QuickBooks Online - Class, Location (either or both)

• Xero - Up to 2 Tracking Categories and options below them

• Sage - Cost Centre and Department

You will find the option to enable Provider Tracking Options within Company Settings.  This very short video tutorial will show you how.

Editing items and Batch Edits
Within the asset register and accrual/prepayment statement you will no longer see the 'Tools' icon to make edits until you select an item using the tick box on the left.  When you select multiple items you will be able to make 'Batch edits'.  Extremely useful if you wish to update the location of 100 assets at once!  Please see this short video that shows you how to use the new editing and batch edit features.

Option to disable condensed journal postings
A 'Condensed Journal' is a where nettTracker will create a summary of the total debits/credits that need to be posted to a particular chart of account category, and this can result with just one entry appearing in your transaction report.  For fixed assets this is often adequate as the required information is in the asset register, and detailed journals could easily result in thousands of lines.

However, we understand from feedback received that it's important that detailed information is included within the journal entries for prepayments and accruals. So, now you have the option to disable condensed journal entries.  This short video will demonstrate all you need to know.
 

What's next?
nettTracker is just over 4 years old.  We've learnt a lot from customers over the years, and we are currently planning version 2.  We understand that the 'Financial Year' settings can be a tricky one to negotiate, and our plan is to remove the 'Year-End' process as it currently works, and replace with reporting options that will work for any given situation.  nettTracker will have a 'closed books' option similar to accounting providers, but there will not be the constraints currently in place.

The key benefits:

• Run the asset register between any two date ranges to review the movements in between (not just one full financial year)

• Forecast depreciation for mulitple years

• Adjust depreciation at any time

• Continue processing months after the year-end knowing it's easy to go back and make adjustments

• Review Tax and Book Depreciation for each asset

By focusing the next phase of development refreshing, and improving our core product, it will pave the way for the future when we start introducing new features like 'loans'.

We do hope you find these updates helpful.  As always we are always open to suggestions and feedback.  If you have any please feel free to email save-time@nett-tracker.com with any ideas you have. 

We can't promise that we can implement all suggestions, but we do take all ideas on board and give them careful consideration.

In the meantime, thank-you for your continued support.

The nettTracker team

What is 'Work-In-Progress' ?

Commonly known as ‘WIP’, work-in-progress is the value of work that has been done that has either; not been invoiced to a customer, or within manufacturing, can reflect the value of a product in the ‘build’ stage that is not counted within ‘finish stock’.

How it is valued largely depends on the systems and procedures that a business has in place. First of all, let’s think about professional services like lawyers or architects. If time is being recorded, that time will have a value that can eventually be converted in to fees.

If we take a manufacturing company into consideration, calculating the value of work-in-progress can be a combination of raw materials (a ‘bill of materials required to build a product’), plus labour, and machinery costs incurred during the manufacturing process.

Accounting for Work-In-Progress

WIP is essentially another form of stock, whether this be physcial materials, or the value of time. A balance sheet account (like stock) is required for Work-In-Progress, and a profit and loss account (cost of sales/direct costs) will be needed for ‘Adjustments to work-in-progress’.

If the balance sheet currently reports a $0.00 value for WIP, but we have calculated there is a value of $10,000 at month-end, the accounting entries would be to Debit WIP on the balance sheet and Credit movements for WIP.

Depending on preference, the journal mentioned above will reverse in the next month to reset the WIP balance to $0.00, and the process will repeat at the end of the month. Alternatively, journals can be entered to approriately increase or decrease the current WIP balance as required.

The benefit of accounting for Work-In-Progress

Measuring WIP is important so that we can report an accurate and hopefully consistent gross margin in the profit and loss report. If a company incurs significant costs in one month to purchase materials and pay employees to build products that have a four-week ‘lead time’, it could be at least a month before stock is produced. It’s likely to be a further month before sales are made.

This is all part of the ‘matching concept’ discussed in a previous article. Accounting for WIP correctly removes the costs from the profit and loss and creates an asset in the balance sheet. It’s not until either goods are sold, or services invoiced, that the WIP cost incurred is then removed rom the balance sheet back to the profit and loss.

This ensures that the sales, and related costs are reflected in the same month, and an accruate gross profit margin is calculated as a result. Using nettTracker, a ‘Prepayment’ adjustment can be made to reflect the current WIP value.

Balance Sheet Reconciliations

What are balance sheet reconciliations? For anybody that works in an accounting or bookkeeping firm, ‘Balance Sheet Recs’, is a term that is in frequent use. In simple terms, it means having a full understanding of the value displayed against any category on the balance sheet.

How complicated are balance sheet reconciliations? Sometimes, they are relatively straight forward. One of the simplest balance sheet reconciliations can be the bank account of the business. If there are no ‘uncleared funds’ in transit, the balance shown on the bank statement will be the exact value displayed on the balance sheet. If there are uncleared transactions, the balance sheet value will be the difference between the bank statement and the uncleared entries.

With the use of accounting software, other simple balance sheet reconciliations are trade debtors and creditors (Accounts Receivable and Accounts Payable). The balance sheet will display a value of each type, but our reports will provide a summary breakdown that will display the unpaid values that agree to the balance sheet totals.

When do balance sheet reconciliations become a little more tricky? Whenever we start making ‘provisions’ in accounting, things can get complicated, and fully understanding what makes up a balance sheet total is not always easy. Fixed Assets is one example. Equipment is purchased, and depreciation is the provision that will write the value down over time.

It can be common for ‘general provisions’ to be made. These can be estimates of expected income or expenditure and when a mixture of these adjustments have been made they can be impossible to fully reconcile. There can be a value within ‘accrued expenses’ or ‘prepayments’ but nobody knows what the values relate to.

Why are balance sheet reconciliations important? Well generally if we have a value on the balance sheet, be it an asset or liability, the double-entry that will either increase or decrease that value will affect the reported profits. If we’ve not yet prepaid costs that relate to future periods, our costs will be too high. On the flip side, we may need to accrue expenditure if our suppliers have not yet billed us.

How frequently should the balance sheet be fully reconciled? This will often depend on the size of the business, and its reporting requirements. Very often the balance sheet is only fully reconciled on an annual basis by CPAs / Accountants. The downside of this is that adjustments are only made annually, so one month often contains distorted values. Whenever possible, it’s better to make adjustments, and fully reconcile the balance sheet every month. This helps to produce consistent monthly profit and loss reports, as well as always having a thorough understanding of the values held on the balance sheet.

The Matching Principle

The Matching Principle is part of the Generally Accepted Accounting Principles (GAAP). Income and expenditure are matched based on dates when events happen / the work is done.

When we are following true accrual accounting, it is important that any expenditure incurred to produce a sale, or deliver a service, is appropriately reflected in the same month as the income to which it relates. Any sales recorded should accurately reflect the period when the products or services are delivered.

Supplier invoices for general overheads, such as ‘marketing’, or ‘insurance’ could be dated January, but the total cost relates to a future period; February to January of the following year as an example. So again, the cost needs to be apportioned to each month.

In a previous blog post ‘Cash v Accrual’, some of the different accounting adjustments are explained (Prepaid Expenses, Deferred Revenue), and these adjustments are required to follow the ‘matching principle’.

Here is a simple example of the ‘matching principle’. A cleaning business sends an ‘annual’ invoice to a customer for services that relate to the next 12 months. The employees that do the work are paid monthly. The annual invoice needs to be ‘Deferred’ so that the income is reflected over the next 12 months, and appropriately ‘matches’ the employee costs incurred to carry out the services.

The same buiness could have purchased cleaning materials ‘stock’. This works like a prepayment. When stock is used in order to do the required work, accounting adjustments should be made to reduce the stock, and increase the costs associated with the service provided to the customer.

Quick summary of the ‘Matching’ principle:

Ensure that bills and invoices are reflected in the period to which they actually relate. For turnover and costs of sales especially, this will help to ensure that gross profit margins are reported accurately every month.

Depreciation - why bother?

Depreciation. It’s a topic that can easily baffle, or be dismissed as only relevant to businesses seven figure turnovers, owning thousands of assets. While there can be something to be said about the simplicity of ignoring depreciation in accounting, it can sometimes be a little short-sighted if we do.

What exactly is depreciation? It’s a method used to gradually write down the value of expensive items like plant and machinery or motor vehicles over their expected useful life. There are quite a few different methods of depreciation (the way the write down is calculated). The method used could be a company preference, or stipulated by the country/state the business operates in.

Financial Accounting v Tax Accounting: Depreciation in the context being discussed in this blog post is ‘Financial Depreciation’ - how the balance sheet is affected. ‘Tax Depreciation’ is another topic completely. When a tax return is prepared the entire cost of an asset could be offset against profits to reduce tax payable, even though the value of an asset has only reduced by 20% on the balance sheet.

So why do we depreciate an asset even if we can claim the full cost for tax purposes? Let’s say a company has purchased a van for $25,000. If this is treated as a cash cost our financial statements would not reflect the fact that we own a van with any value. Treating the van as a fixed asset will ensure the balance sheet reflects this investment. A year from now it’s likely that the van will be worth less than what we paid for it. So, using our chosen depreciation method, we gradually write down the value of an asset.

How frequently should adjustments for depreciation be made? Traditionally accountants/CPAs have created adjustments between the balance sheet and profit and loss annually when the books are being prepared. The downside is that very often ‘month twelve’ figures are distorted due to a single annual adjusting journal. For general reporting consistency it’s advisable that these kind of adjustments are made each month.

What are the benefits of maintaining an asset register and recording regular depreciation? Firstly, the balance sheet should reflect the true and fair value of assets owned by the company, and the profit and loss should report a consistent monthly charge against depreciation. If you need to report regularly to the bank, or if the business needs to apply for a loan or funding of any kind, accurate financial reporting becomes much more important.

Occasionally, self-employed business owners that are applying for mortgages will need to provide details of financial accounting statements, as well as general tax return information. If there have been significant asset purchases over the last couple of years that have been treated as ‘expenses’ instead of ‘fixed assets’, this could potentially create the difference between reporting a loss instead of a profit. Negative financial reporting could be detrimental to the success of a mortgage application.

Perhaps it’s time to sell an asset or maybe the entire business. Having a record of all assets purchased, and their current net book values held neatly in one place can make life easier when negotiating a sale. In the unfortunate event that a business has suffered from theft or vandalism, flooding or fire damage, the ability to provide an insurance company with a readily available fixed asset register will make life much easier when making a claim.

Fixed assets and Depreciation: Not just for the large corporations; all businesses, large and small.

Cash v Accrual

When recording bookkeeping entries, and then later preparing tax returns, there are really two main methods of approach. ‘Cash Basis’ or ‘Accrual Basis’. Without trying to over-complicate this, let’s compare the two.

Cash Basis: In very simple terms the ‘books’ or ‘accounts’ (depending on which side of the pond you live), could be compiled purely by recording all of the business related payments and receipts that had gone through the bank account, appeared on credit card statements, or possibly paid out in cash.

Accrual Basis: There will be some items accounted for in the same way as the cash method, but we are also accounting for income and costs regardless as to whether they have been paid or not. Customer invoices, suppliers bills could be dated prior to the year-end date date, but they may not get paid for a month or two. Nevertheless, we still need to account for them.

However, it’s not quite as simple as including amounts that have not been paid yet. Further adjustments are required to reflect the period to which the income/expenditure relates to.

Prepayments: For example, a bill for insurance may be received halfway through the year that covers the next twelve months. Six months for this financial year, and six for the following year. This is the kind of entry that needs to be ‘Prepaid’, and adjustments made each month so that the correct monthly charge is reflected within expenditure.

Deferred income: Some businesses invoice customers for subscriptions services that could possibly be for five years in advance. Receiving the paid invoice is great for cashflow, but again should actually be reflected in the profit and loss over the next 60 months so that it is in line with the costs associated to provide the service - paying employees as an example. So, the income is ‘Deferred’.

Accruals: If a supplier forgets to send a bill (or is sent late) but a business already recieved the goods or services, an ‘Accrual’ for those costs would be required. On the flip side, a business could have been working on project for some time and not yet invoiced the customer. Income should be accrued, or ‘work-in-progress’ (WIP), adjustments created.

Depreciation: If a vehicle is purchased for the business, or any other expensive items of equipment, they are treated as fixed assets and depreciated over a number of years in line with expected useful life. On a cash basis, the cost of the asset would be written off in the first year.

Which method should you use?

Your accountant or CPA should advise you which is necessary for your business type. Sometimes you will not have a choice. Depending on the country, region, size of business and turnover, it will be mandatory to have the books/accounts fully prepared on an accrual basis.

What are the benefits, pros and cons of each?

Well, let’s just start with ‘cash basis’ accounting. The obvious benefit here, is that it is simple. Money received, money paid, and voila, you’ve pretty much calculated your profit/loss for the year. However, it is unlikely the accounts will report the true profitability of the business. Some months could look drastically different from others. If five years worth of income was received in one year, and tax paid on that value, much more tax could have been paid than was necessary.

True accrual accounting helps to ensure there is much more ‘consistency’ in the values that are reported in the profit and loss on a monthly basis. If you need to prepare regular managment reports for board members, or the bank, they will be looking for consistency and trends in the financial reports. Too many peaks and troughs, and questions will be asked. ‘Why has income dropped?’, ‘why are the costs in this month so high?’. Using a series of adjustments to prepay costs, defer income and account for depreciation every month, the profit and loss should report figures that accruately reflect the way the business is operating.

The downside to true accrual accounting is that more work is involved. Calculating monthly adjustments, creating journal entries between the profit and loss and balance sheet every month, and monitoring and updating schedules so that we fully understand what our total prepaid expense and deferred revenue items are, and the breakdown of fixed assets.

True accrual accounting is made much easier with nettTracker. Taking care of all of the adjusting journal entries, and updating the statements you need to agree to the balance sheet. Month-end made easy.

Who doesn't love a good checklist?

Just like programmers love good logs, accountants really do like a checklist. Well, actually who doesn’t? My wife and I don’t go shopping without first writing out a list of what we actually need. Otherwise, it’s easy to get distracted buying things that aren’t required (‘Ooops, already had 3 tins of tomatoes!!!’), and then completely forgetting to purchase that all important box of tea bags. Resulting in one or two profanties when back home, and a return trip to the supermarket is required earlier than expected.

It’s no different when we are preparing a set of accounts at the end of each month, quarter, or year. We need a checklist. If not, something is easily forgotten, there is likely to be an outburst of profanities, and there will be more work to do. Sometimes more corrections to make than if we had our checklist in place first and followed it.

More accounting software programs are starting to add features that enable users to create checklists / tasks / workflows. However you wish to phrase them, they amount to the same thing. That is to follow a process, ensuring a job (producing a set of accounts / ‘get the books done’) is completed fully, and accurately.

Now if your current accounting software package doesn’t including a month-end check list, or perhaps you aren’t that keen on using the offering, there are lots of alternatives. Software applications like ToDoist, and Monday.com offer free versions that will be sufficient to help you get started with buidling regular tasks and checklists. If you are using Office 365 check out the apps store from within the Microsoft Teams menu. If you work in an accounting firm, there are an increasing number of practice managment apps available such as Liscio or Client Engager.

Now I wouldn’t advocate using Microsoft Excel in place of an app that has been designed to solve true task management, however, creating some form of template first could help give you ideas of what it is you need to do. Adding some conditional formatting against a field is easy to do with a simple Y or N typed to reflect if a task has been completed. With conditional formatting, cells can instantly change colour when adding relevant characters. Using office 365 or Google Docs, you can share easily with others if you are working in a team.

Just simply exporting your P&L or Balance Sheet into Excel could be the first step to help create your checklist as each account category should be reviewed or reconciled. Althought it’s a start, doing this alone though may not be enough as it doesn’t ask questions like ‘Are all the suppliers bills uploaded to Auto-Entry, now published into Sage?’

Check out this short 2-minute video on using conditional formatting in Excel. When you are using nettTracker to adjust your balance sheet accounts, you can enjoy entering the Y a lot quicker than if you are making adjustments manually.

As I previously mentioned, Excel is a good tool to help get you started, but software fully designed to meet the needs of task managment will provide much more than the ability to list tasks. Automated reminders, e-mail notifications when tasks are complete, and audit trails are just a few features that spring to mind that you won’t have using Excel alone. These extras become so much more important when working with your team and your clients.

A Free Tasks and Checklist Template can be downloaded using this link that may help give an idea on some of the monthly reviews required. Of course, the number of reviews undertaken, and frequency, will depend on the type and size of business, but the more accountants and business owners get into a habit of regularly reviewing financial statements, there tends to be fewer ‘surprises’ when accounts or books are finalised each financial year.

But how did it do that!!?

One of the beautiful features that nettTracker has is the ability perform automated tasks for our users. For example, all of the monthly balance sheet posting takes place automatically on the last day of the month. But it isn’t necessarily quite so beautiful if things go wrong. When systems perform tasks automatically, they unleash the nightmare that is diagnostic tracing.

It can be hard enough for a developer to work out why something went wrong when they can step through each line of code in a controlled environment and see what happened at each point, but when the code can be scheduled to run at specific times, usually overnight when processing loads & network traffic are at their lowest, tracing faults and being able to understand the causes is a critical challenge to the dev team.

We built two key architectural components when we started nettTracker. The first of these was a flexible task scheduling component that we could use to plug new automated tasks into the system as we created them. This is a really cool system and we can plug in new automated features without having to redeploy everything.

The second key component was our logging platform. And it saves our lives!!

This sophisticated tool allows each of the different sub-systems to put their logs and trace records in a single repository that can be analysed to give clear trends on how the system is being used, where we need to invest enhancement effort and, most importantly, what was happening before and after an error occurred.

We capture thousands of log entries each day that we can then analyse for errors & repeated faults. In many cases we actually identify problems before they even result in an error. We have have daily error reports distributed to the team so we can quickly pick up something that might have happened during the previous 24 hours. In fact, it is common for our support team to reach out to a customer to let them know they have a problem before they have even become aware of it themselves!

In most engineering environments, it is putting effort into the boring stuff that gives you reliability and stability, but for us programmers, nothing can beat a damn good log.

It's not always about being flash and exciting.....

Last year I moved house with my family. Our new home being a ‘new build’, you’d think it would have pretty much all the ‘mod-cons’ that you need. After all, it’s brand new, so it should be fully kitted out. Well, that’s not quite the case.

I live in what can only be described as a very ‘hard water’ area. After a week the kettle would need descaling, the shower head quickly covered in limescale, and all the taps around the house looking old before their time. So, we decided to invest in a water softener.

Now a water softener is not the cheapest appliance in the house, and to be honest, it’s not much to look at. In fact 99% of the time it is out of sight below the kitchen sink. It’s only really paid any attention every 6-8 weeks when the salt needs to be replaced. Other than that, it works away doing its thing.

Since the installation of the water softener 9 months ago, the kettle has not had to be de-scaled once, the shower head and taps look as good as new, and cleaning the shower and bathroom is less work. Not only that, it’s the limescale building up that you can’t see that can cause the most damage. In the pipework, the dishwaser, the washing machine. Often reducing the life of appliances by half.

Many accounting software programs have fantastic core functionality, but often lack the tools that are required to really comply with true ‘accrual’ accounting. This is when we get to the stuff that can sometimes feel a little ‘dull’ - but it’s important to get right.

We can be left with a lot of tasks that don’t fill us with excitement, yet still we plod on using methods that will generally take us longer than they should, because ‘that is what we’ve always done’. Not only do we stick with what we know, but quite often could be doing more harm than good. Using the same formulas in a spreadsheet that could have been incorrect for the last couple of years.

Investing in any type of software can sometimes incur a cost, and some time might be need to be spent to learn how everything works. Like a water softener, it might not always be for something that appears to be immediately essential, but gradually, these dull tasks can eat into much more time than we realise.

Understanding how technology can help your business, and identifying all tasks that can be automated will increase efficiencies and profitability. If there is anything that you do ‘manually’ on a regular basis, it is likely that there is a piece of software that can do the job more accurately in a fraction of the time.

Investing a little bit of time and money now on improving systems and processes, will pay you back dividends later.

It’s a date, just a simple date…or is it?

Who would be a programmer? Always under pressure to make features ‘just a little bit better’, all the while watching over our shoulders as ChatGPT and AI show why it is likely to replace us all over the next few years!! And then you get hassle because you can’t make a straightforward date field work - I mean, why are we getting paid at all!!!

In all fairness, life in a development team is not all bad, but it is surprising just how much trouble dates and times give developers, although perhaps it shouldn’t be when you look at one really simple problem: US-format vs UK-format. Here in Blighty (I can’t bring myself to call it Great Britain right now), we like to put the day number first, then the month and then the year, whereas our erstwhile friends across the Atlantic prefer to put the month before the day.

Does that really matter? Well, to a programmer this is a disaster, not least because for the first twelve days of every month there is absolutely no certain way to know what the date actually is - whether 5/4/2023 means 5th April or 4th May only a Jedi Master could tell you (too oblique?).

At nettTracker, this ambiguity is compounded because about half of our Company connections come from regions that use US date formats while our servers operate in European time zones. The way we deal with this is to inspect the region properties of the Company when it is first being connected to nettTracker and assign a date format accordingly. Our user interface (UI) then adjusts its date formatting according to the company and it all works very nicely. But with data input, things can get tricker.

Most UI systems utilise something called UTC or coordinated universal time, to encode a date and time value when sending it over the wire. This effectively resolves the problem of understanding whether a date is US, UK or any other format. UTC also includes a timezone component to assist the consumer know how the value compares to their current location, -8 indicating PST for example, showing it is 8 behind GMT. However, if the developer doesn’t pay really close attention, they may not realise that their code has translated the date and time value into their own timezone.

Why is this a problem?

When our servers receive a UTC date, it gets automatically shifted into GMT or BST. This means that any user in LA working after 4pm local time, will effectively be in the following day relative to the server. If a user was to submit a request that included a date, it is entirely possible that the servers would silently change this date to the next day and no one would notice.

Naturally, we have strategies to deal with these eventualities, but every now and then something slips through the net as we found last week. A new tool for changing the year-end date was not being correctly parsed and this resulted in a financial year with 13 months by mistake! A simple fix and a slapped wrist later, all is happy again, but it just goes to show how easy it is for something so simple to become such a problem.

Things like this are a great reminder why programmers are probably not going to be replaced by AI just yet…although, maybe they would not have missed the problem in the first place!!!

Reviewing working processes and implementing software

If you are looking at using any form of software, you’ve probably been thinking that some of your current processes could be improved.  In this digital era where new apps are emerging all of the time, it can be incredibly difficult to know what is going to be the best fit for the type of improvements you’re trying to make to any working practice. 

The apps ‘marketplaces’ for Intuit, Xero, and Sage combined, contain thousands of apps, and trying to find something that can really help can be like looking for needle in a haystack.  Sometimes, you think you’ve found what you need, only to discover several hours, days, maybe even weeks or months later, that it isn’t fit for purpose.  So off you go again, spending further time looking, further time testing, finding yourself going around in circles, no further forward, and probably confusing yourself over what it is you actually need.

All of that time looking for apps, and testing apps, can be saved if you reach out to the guys at Apps Advisory, and 4PointZero as they’ve done a lot of the legwork, and they are not biased towards any of the software solutions available.

If you are thinking about implementing any software, first of all consider if you really do need it.  What are the benefits.  Will it save time?  Will it increase productivity and profitability?  Sometimes, for sole practitioners, adapting to use new software can feel like an immediate additional cost when currently using Microsoft Excel or an Accounting Desktop Solution for 90% of all work being done.  After all, you are getting real value from that software, right?  Well, probably not as much as you think.

If you are the owner of an accounting firm, it can be little easier to put a price on employee time than if you are just working for yourself.  Either way, all time has a value whether it’s paying employees, having the ability to do more chargeable work in less time, or simply working less hours and spending more time with your family. 

It’s a good idea to work out exactly how long it takes to do certain tasks, the frequency required, and for accounting firms, are these tasks are being carried out for multiple clients?  You may surprise yourself as to how much time is actually being spent in certain areas.  Maybe even create a template in Excel and ask employees to contribute their thoughts so that you can calculate an average.  Everyone could have a slightly different perspective on the time taken to do different jobs. 

If we take an example of an accounting firm that has 50 clients requiring services that takes an employee 1 hour per month to complete, that’s 600 hours of work.  If we are being prudent and thinking we can cut time by 50% by using software to automate processes, 300 hours per year gives us back an extra day a week.

When was the last time you reviewed all of your current processes?  Whether it’s for general admin, task management, time recording, communications, bookkeeping, reporting, tax preparation and more, there is usually a piece of software that can free up time, making you much more efficient.

You might want to take on more work, or overall, just do less.  Sometimes the latter is actually better for us.

Features, features, features

One of things that we love here at Farscape is spotting a problem that customers might be experiencing and then putting a new tool in place to take that problem away. I mean, that’s the reason for having tools like nettTracker isn’t it - to make life easier!!

The normal way this works is quite simple really. Ash will tell me that someone has raised a support ticket because they couldn’t do something. I’ll take a look, do my best to bat it away because we’re too busy building some wonderful new feature, before reluctantly accepting that it actually makes a lot of sense to build a tool for everyone, at which point we park what we’re doing and build the tool!!

In reality, these normally start as support tools and once we’re happy they are robust enough, we will introduce them into the primary nettTracker application for everyone to use. This is a great way to ensure we don’t drop code into the melting pot that hasn’t really been tested for as long as it should. And because we are a small team, we can be very agile in how we do stuff - quickly changing focus to complete a specific task before returning to long-term projects.

In the last couple of weeks, we have done exactly this.

Firstly, we introduced a new tool that allow users to change the length of the current financial year. This normally comes about when a previous year is closed but the default has been accepted without awareness of changes within the company that mean the year needs to be an unusual length. Changing this was an absolute nightmare for the support teams!!

This week we have released a second useful tool for users who are learning how to use nettTracker and, perhaps after some exploration, realise that they want to reset and start again - maybe removing everything or keeping some of the configuration work they have done. The new ‘Company Reset’ feature means users can do exactly that, as well as changing the dates that nettTracker starts processing - another common support question.

In the pipeline we have some other great tools, including a processing rewind, that will allow users to move their companies back in time if they have processed a period by mistake.