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Accounting Question


Terry D EA

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Regarding workman's compensation insurance. To simplify things a bit, this client's workman's comp insurance is paid for periods in the future. Example; premium paid in June 2018 covers the period from 6/18/2018 thru 6/18/2019. This is an accrual basis client. I always debit the WC pre-paid insurance account and calculate the period ending adjustments. The client received a check in February 2018 from the insurance company as an overpayment as a result of an audit credit. The stub with the check does not say what period the credit is for. Apparently, and I think it is safe to assume, this is for the period of 6/17/2017 thru 6/18/2018. I'm probably overthinking this but where do I apply this credit? It seems to me this credit would be applied to the previous period and therefore effectively reduce the insurance expense for the year ending 12/31/2017 which results in overstated insurance expense, thus requiring the tax return to be amended. Is there a better way to handle this?

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Credit the prepaid account and then do your period ending adjustment.  It will only affect the current year - unless your client had reason to KNOW that he was overpaid before the audit took place , and then your expense for 2017 would be overstated because that should have been an estimate for the accrual basis tax payer.. But yes, you are overthinking it.  Do it in the current period and move on.

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1 hour ago, rfassett said:

Credit the prepaid account and then do your period ending adjustment.  It will only affect the current year - unless your client had reason to KNOW that he was overpaid before the audit took place , and then your expense for 2017 would be overstated because that should have been an estimate for the accrual basis tax payer.. But yes, you are overthinking it.  Do it in the current period and move on.

Thanks rfassett, your response was my original thought and as you said, I began to overthink it. This guy is normally very good and I do all of his WC audits and neither of us had any idea this would have been overpaid. The audit always takes place in June, he received this check in February.

ILLMAS, I would love to see someone's prepaid insurance worksheet. This client's WC premiums are for three employees in an auto repair shop at a direct expense of 100% so no real involved calcs. However, I have another client who tracks their own WC insurance and I know they screw it up every time in their QB and I have to fix it. Thanks!

 

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Abby Normal you are correct. Moving forward, I guess I was not overthinking this scenario. I was aware of adjusting entries for prior closed periods. The check my client received was a refund for a prior period as I stated in the OP. This refund now causes the WC expense for the closed period to be overstated. I just couldn't remember the JE to correct a prior period reporting error. This helped trigger my memory.  http://smallbusiness.chron.com/book-prior-year-adjustment-accounting-77570.html

Now, the need for an amended return. With this client, I have discovered a few small errors that would cause an overstatement of operating expense and some an understatement of expenses which very well end up in a wash. When I finalize all of this, statements will be included in the notes that identify the adjustments with the outcome and determine the need for an amended return.

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If a client calls the insurance agent for changes in coverage that change the total premiums on a policy, I do take those into account for accrual basis taxpayers, but for prior year worker's comp audit additional premiums or refunds, like rfassett described, I run those through expense in the current year. I don't ever go back and amend the prior year return or make a prior period adjustment on financials for them.

@Terry D, you asked for a ppd ins worksheet, so I took a snippet from one of my excel files and simplified it.  This is for a fiscal year client, but easily adjusted.  I've changed the fields to blue where I'd make an entry so you can more easily see how it works. The # of days keys off the date at the top of that column and are then used in calculating the expense since it is working off the expired portion of the terms of only the current year policies; the rest is simple addition and subtraction.

Book1.xlsx

ETA - sorry, I thought it would show a preview. W/S looks like this:


Capture.JPG.5e1ffe5aed7a376edbdb4c4e04115a13.JPG

 

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